Lennar Corp.'s $88.2 million 1Q2008 loss March 26 gives Wall Street little hope for positive news from KB Home CEO Jeffrey Mezger during the company's earnings call on the morning of March 28. Analysts expect to hear about flimsy new-home orders, more big-balance-sheet charges, and further margin erosion.
Despite existing-home inventory showing its first signs of clearing out and new-home neighborhood surveys indicating a surge in buyer traffic, new-home sales remain tough to nab. The Census Bureau and Department of Housing and Urban Development reported that new single-family home sales in February were down 29.8% year-over-year. And despite rising median sales prices during the month, discounts and other sales incentives are keeping pricing competitive.
The spring selling season is off to a less-than-impressive start, but small pockets of optimism have started to bud. JPMorgan analyst Michael Rehaut, for one, remarked on the trend in a research note this week: "While the builders' 29% move in the past week (S&P up 6%) has largely been market related and short-covering driven, in our view, we believe that, de facto, the group has in a sense begun to reflect optimism that a fundamental trough is near for the industry."
But for the next couple of quarters, Rehaut expected things to remain rocky for builders like KB. In fact, he anticipated that for 1Q2008 KB's new orders would drop another 30% and cancellation rates would remain high while impairment charges would represent as much as a 9.4% hit to equity.
And with bankrupt TOUSA serving as a poster child for what can go wrong in a joint venture when the economy doesn't cooperate, KB's Mezger will likely have to give listeners significant color on the company's exposure to such off-balance sheet vehicles. Of particular concern are two JVs in the Las Vegas market--Inspirada and Kyle Canyon--that are beginning to unravel. According to JPMorgan research, KB's holds 49% and 10% stakes in the projects, respectively.
However, if Rehaut's right and there is a degree of optimism sneaking into builder executive bones, Mezger could look to temper the negative news with a few highlights. Here's how he might look to accentuate the positive:
The company is on strong financial footing. Despite a $1.31 billion loss for 2007, KB headed into its first quarter sitting on a $1.33 billion cash life preserver that can certainly buoy the company for some time.
The company is reallocating assets to better performing markets. Earlier this month, the company announced it would be shutting down operations in Illinois, Maryland, New Mexico, and Virginia. The company entered Chicago in 2003 with the acquisition of Zale Homes but never became a Top 10 player in the market. A 2005 start-up Mid-Atlantic division proved to have poor timing. And Albuquerque and Tucson failed to become the big-time housing markets that the company had hoped for when it acquired Oppel Jenkins in 1995.
The company has competitively priced product. With the company squarely focused on the entry-level market, it continues to reduce the square footage of its homes so its pricing is inline with existing-home inventory. In 2007, KB cut average home prices 12%, from $280,000 in 2006 to $247,000. Moreover, the company is investing in the significant value engineering of these plans to shave more costs out of building them.
The company is developing new sales strategies to attract buyers. Keeping up with competitors, the company began offering price protection and rate lock programs. The programs are designed to inject consumer confidence into the market. Moreover, the company has experienced decent success with its "My Home, My Earth" program. While the marketing program lacks the teeth of a true green initiative, it is boosting eco-conscious product sales.
The company just received some feel-good accolades. KB recently became the first home builder to earn the NAHB Research Center's highest award for quality across all its divisions. Moreover, the California-based company ranked first among home builders on Fortune magazine's annual list of Most Admired Companies.