KB HomeKBH

Morningstar Rating

Stock Research and Analysis

by Eric Landry

KB Home's conservative management policies have ensured the company's survival, while some lower-priced products have set it up to prosper once the industry bottoms out.

Management's policy of historically developing smaller, less risky communities Read more

Bulls Say

Sales are looking up for KB in 2009, as first-quarter results featured a 26% increase in orders. We expect second-quarter orders to decline significantly, but for the last two periods of the year to enjoy heady year-over-year order growth.

An operating philosophy of buying smaller amounts of entitled land allows KB to be one of the few builders to generate cash over a long period. The company produced positive cash flow in six of the 10 years ended in 2006, threw off a cumulative $1.39 billion in operating cash flow over the past two years as it further pared its balance sheet.

The majority of KB's active selling communities have a price range that enables buyers to qualify for Fannie, Freddie, FHA, or VA loans. These loan products have remained relatively available throughout the downturn. Read more

Bears Say

KB's plunging revenue line is making it very difficult to properly align the company's overhead expense structure. Even though management chopped more than $320 million out of the annual expense, it still amounted to more than 16% of sales. This is up from about 12% in a "normal" year and will be a much higher ratio this year unless management can make even larger cuts.

Like all homebuilders, KB's business is still in rapid decline. This year's revenues may be down by about 80% from 2006's record $9.4 billion.

KB is highly exposed to most of the former "bubble" markets. Though these areas will likely feature decent job growth once the current economic malaise subsides, home prices aren't likely to enjoy any type of appreciation for several years. Fully 55% if its business in 2008 was done in California, Arizona, and Nevada.

KB has pulled or is in the process pulling out of several markets, including Chicago, Albuquerque, and some Mid-Atlantic regions. Read more

Strategy

KB initiated its KBnxt operating plan in 1997. The foundation of the strategy is to buy relatively small parcels of entitled land and to refrain from building the vertical structure without an order. Read more

Management

KB's corporate suite was reshuffled after the board discovered that chairman and CEO Bruce Karatz and the head of human resources had doled out backdated options for several years ending in 2006. Karatz was ousted in late 2006, and chief operating officer Read more

Profile

Founded in 1957, KB Home builds and sells single-family homes to first-time, move-up, luxury, and active-adult homebuyers in 29 markets in eight states. In 2008, it delivered Read more

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