Friday, June 26, 2009

KB Homes - Is It Planning For The Future

KB Home (NYSE: KBH), one of America’s largest homebuilders, reported Q2 financial results. Predictably the results include massive amounts of red ink. But when you try to look into the future as stock market investors are prone to do you find confusion. Read this quote about pre-sales:

“The Company’s backlog at May 31, 2009 totaled 3,804 homes, representing potential future housing revenues of approximately $796.9 million, compared to a backlog of 6,233 homes representing potential future housing revenues of approximately $1.47 billion at May 31, 2008. Company-wide net orders for new homes in the second quarter were 2,910, down 31% from 4,200 in the second quarter of 2008 but up 59% from 1,827 net orders in the first quarter of 2009. The Company’s cancellation rate based on gross orders improved to 20% in the current quarter, compared to 28% in the first quarter of 2009 and 27% in the second quarter of 2008.”

Essentially they are telling you that the backlog number is no longer the predictable factor that it used to be. The cancellation rate while greatly improved is still terrible. Imagine what Macy’s would look like if 20% of all sales were returned.

What you need to hear from the executive is what they have learned from this current round of difficulty. Will the model stay the same? Sure they are trying to become more energy efficient but that is just a feature similar to kitchen finishes.

Loading up on land, managing your trades, build interesting model homes, buy ads in the local paper and wait for buyers to show up may not be the way of the future. The management team may be frozen on the bridge and are not preparing for the future.