KB Home (KBH, Financial) disappointed the street with its fourth quarter results, as earnings lagged the street expectations. Its revenue grew pretty well year over year, but the company had a dismal performance with regard to its margins. It was mainly on account of a decrease in the inland markets of the KB's West Coast homebuilding region. Along with this, its promotional strategies such as incentives and price reductions also weighed on its financials. Led by its poor performance the stock hit its 52-week low few days back with the management expecting the sluggish trend to continue for some time.
Quarterly overview
Its revenue for the quarter rose 29% to $796 million from a year ago while profits declined 12.9% to 27 cents a share compared to last year. Its earnings lag way behind the analysts’ consensus of 52 cents a share. Apart from its pricing issues, the numbers were also affected by softer demand in some locations. However we cannot neglect the significant increase in its revenue, which may be an indication of a turnaround.
During the quarter, KB delivered fewer homes because of which it lost some operating leverage in its indirect construction cost. And the costs continue to rise on account of its current and future community growth. But these short-term pains will yield good results in the coming years and the management expects that its future order growth will coincide within the range of its community count growth.
Expected growth drivers
Its increased expectation stems from the 15% rise in traffic levels per community. This data point reinforces that there continues to be strong interest in home ownership. Its back log increased a whopping 34% from last year, which is the highest rise since 2007. This will be a significant driver for its top line in 2015. But the company still has to do a lot of work as far as its profitability is concerned.
In this direction, KB is evaluating potential opportunities to monetize long term development assets in order to redeploy the capital into more productive assets having a shorter life cycle. Consequently it sold its last remaining land in Atlanta, where it no longer has any ongoing operations. Along with this, the company is working hard to reactivate properties that were held for future development in various markets.
These efforts will improve its asset efficiency and generate a greater return on invested capital. Interestingly, it has already made some improvement, and its profitability is growing; to the extent that it can support its current growth strategy without having to access capital markets for equity. These are encouraging facts indicating the improving fundamentals of its business.
Conclusion
However, in the near term, the market remains sluggish in its pace of recovery. The company expects its first-quarter margins to fall considerably from last year. This is quite a negative expression and could affect its stock performance, unless it performs better than its estimates. Currently it has a trailing P/E of 1.46, while a forward P/E of 10.73 is again indicative of near term slackness in earnings. Therefore, in the light of these facts it seems prudent for investors to avoid this stock for the moment.
