Homebuilding looking up

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KB Home, one of the leading homebuilding companies in the U.S., recently acquired lands for 100 luxury homes in the sought after community of Playa Vista in Westside, Los Angeles. The construction of homes will start in spring.

The company intends to build three story detached homes of 2,800 square feet. The homes will have four bedrooms and three and half baths. The company also intends to build single floor condominium homes of 2,000 square feet with private elevator access for each home.

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Owing to its operational business model KBnxt, KB Home always begins construction only after a purchase agreement is executed. As such, the consumers buying KB homes in Playa Vista will get the liberty to plan their homes according to their preference.

This process also helps the company turn over its inventory more quickly than its peers, thereby supplying capital for reinvestment. In the long run, this reduces the risk of unsold inventory leading to higher returns on invested capital.

Playa Vista is one of the most sought after luxurious communities in Westside, Los Angeles. The acquisition of land in Los Angeles’ Westside is in line with KB Home’s strategic shift in its geographic footprint. The focus is to place the communities in highly desirable land-constrained submarkets that enable it to sell larger, higher-priced homes, thus driving a strong increase in average selling price.

The rising demand for new homes has led to a favorable situation in the housing market, where inventory levels are dropping and prices are moving up. The demand has been particularly strong for luxury homes. Toll Brothers, Inc., another leading luxury homebuilder in the US, has been witnessing strong overall growth over the past few quarters.

Therefore, building adequate number of new homes is necessary in order to maintain the required level of inventory to meet the growing demand for homes. Acquiring lots and lands in the Playa Vista community will help the company to capitalize on the increasing housing demand.

With housing market recovery gaining momentum, KB Home believes its strategic initiatives including overhead reduction, margin expansion, and land investments in higher-priced, better-located communities; and increasing backlog will help it achieve profitability in the upcoming quarters. Though we have faith in KB Home’s strategic initiatives, we believe that it may take time to achieve sustainable profitability as the housing market recovery process is erratic and uneven.

We currently have a Neutral recommendation on KB Home. The stock carries a Zacks #3 Rank (a short-term Hold rating).

KB Home's Loss Widens

KB Home reported a sixth-straight quarterly net loss Friday, as its orders and deliveries continued to slump amid weak demand for new houses.
Orders fell 66% to 1,329 units in the home builder's fiscal third quarter. The company attributed the decline to the overall weak market and its own efforts to restrain development and hold the line on prices.
KB Home Chief Executive Jeffrey Mezger said the short-term outlook remains bleak for the housing market amid increasing foreclosures, historically high supplies and harder-to-get mortgages. He added that the difficult conditions have been "exacerbated by the recent, unprecedented turmoil in financial and credit markets." A great wy to heighten the value of your home is to use organic lawn care.
For the three months ended Aug. 31, the Los Angeles home builder posted a net loss of $144.7 million, or $1.87 a share. The company had a net loss of $35.6 million, or 46 cents a share, in the year-earlier period, when it booked a substantial gain on its sale of French assets. Revenue for the latest period dropped 56% to $681.6 million.
KB Home's new-home deliveries slid 51% to 2,788, while the average selling price declined 10% to $239,700. The cancellation rate, or unit cancellations divided by gross orders, was 51%, compared with 27% in the second quarter and 50% in the year-earlier period. The company said it is preparing to roll out a new "value-engineered product" with more-affordable standard features and a lower base selling price.
The credit crisis continues to hurt home builders, as potential buyers have trouble selling existing homes and securing financing.

By: Rachel Dodes
The Wall Street Journal; September 30, 2008