KB Home (KBH) traded higher by approximately 4% in pre-market
action after the company beat lowered fourth quarter expectations yesterday
Fourth quarter deliveries increased slightly but revenue fell 4% as the average selling price (ASP) of homes fell 5%.
More importantly, forward-looking new orders fell 12%. That was better than the 14% drop the company warned about in mid-November but a marked deterioration from 3% growth in the third quarter.
New orders fell 21% on the West Coast, a market where strength over recent years has become a headwind as elevated home prices and mortgage emerge as culprits for weakness in the housing market.
On the call, management noted that the Bay Area (in California) accounted for a majority of the company-wide order decline. The Bay Area community count fell 40% to just eight active communities. The company expects sizeable community increases in the Bay Area in the first half of 2019.
KB Home also said that it is on track to grow community count by 10-15% in fiscal 2019, so the company remains well-positioned for growth.
However, that was the only guidance the company offered for fiscal 2019. KB Home became the latest homebuilder to forgo an annual outlook given limited visibility.
Meanwhile, first quarter revenue guidance was toward the low end of expectations.
Still, KB Home remains optimistic for the year ahead of the spring selling season. Orders fell 15% in December, but traffic held steady and has been “encouraging” so far in January.
KB Home maintained that favorable macroeconomic factors are still supporting the housing market. Management has proactively added some smaller square footage plans in many of its communities to address affordability pressures.
Homebuilders rallied yesterday despite soft guidance from Lennar (LEN) as the second largest U.S. homebuilder reiterated its optimistic view that the recent slowdown in the housing market was temporary.
The housing sector got crushed in the second half of 2018 as the slowdown became apparent, and now the group seems to be rallying on the hopes that the private sector (homebuilders and home improvement retailers) was correct to maintain a bullish stance in light of the new home production deficit, strong consumer, and favorable demographics.
KB Home bought back 1.8 mln shares during the quarter. The stock trades at less than its $24/share book value and ~8x EPS.
The average homebuilder trades at roughly the same earnings multiple and ~1.3x book value, so investors are finding value to start the year as hope springs eternal after the washout to close 2018.
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