Despite coming off what some would consider a rock star performance during its first quarter--orders were shockingly up 26% year over year--most housing analysts expect there won't be an encore when the company reports before market open on Friday, June 26. Analysts estimate that the company will lose an average of $0.64 per share on average revenues of roughly $339.1 million for 2Q2009.
Despite the success of the company's Open Series of plans, orders are likely to touch ground again because, as Pali Capital's Stephen East explained in a recent research note, "the [year-over-year] comparison is quite a bit tougher than last quarter's marshmallow." However, East also warned that his estimate of a 31% decline in orders to 2,885 may be a touch overly negative. He wrote:
"We still believe there is upside from two areas: Texas and California. Texas is part of the Central region that we have down 35%, but given the outstanding reception the Open Series has had in Houston, we would not be surprised if this order forecast was too slim. California is in the West Coast region which we have down 30% and absolute orders only 225 higher than last quarter. Given the seasonality and tax credit, this may be too conservative. So, if there is one area that we like to surprise on the upside, the orders metric is it."
But even if orders come in stronger than anticipated, average selling price is likely to be down once again, contributing to a revenue slide and pressuring profitability. Last quarter, operating margin came in at -7.5% while SG&A as a percentage of revenues climbed to 20%, despite a 52% reduction in total dollar value.
The company also ended the last quarter with $1.1 billion in cash on its balance sheet and no debt maturities through 2011. Although the company has ample liquidity to outlast the downturn, cash flow for 2Q2009 could be compromised, possibly turning negative, as the company reopens retooled communities, executes on scheduled takedowns, and spends on new land development.
However, concern over cash flow was one of the factors that played into Moody's downgrade of KB Home's debt. The ratings agency lowered the company's corporate family rating from Ba3 to B1 and its senior notes from Ba3 to B1.
According to an article from Market Watch, "The downgrade, in part, reflects the agency's expectation that the homebuilder will continue to post operating losses and that its pace of cash generation will slow as further inventory reduction grows more challenging. The move also reflects Moody's expectation that KB Home's debt leverage will increase, 'cushion under financial covenants will narrow, and pre-impairment losses will continue.'"