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Holla if ya hate homebuilders! If you hate homebuilders, read no further. If you hate homebuilders, move to Siberia. If you hate homebuilders, go from here…go to Suprette.
Yes, that’s right. $$$MR. MARKET$$$ just cannot get enough of homebuilders. Is it the smell of wood? What am I, wood? Is it the “Ka-Knock Ka-Knock Ka Knock” of that lonely hammer echoing across the newly razed farmlands? Of course not. Is it the angry rumble of the hungry backhoe as it digs up the old trashdumps to make a new foundation for some 3 yr old’s playroom? Not exactly. Is it those lean strapping young lads with their tan muscular bodies hauling shingles up to the roof? Umm…the thought never crossed my mind.
How many times do I have to repeat myself?? It’s all about earnings earnings earnings.
Today I bought KB Homes (KBH) at 82.59. I will sell it in 4 to 6 weeks at 95.17. Here’s why I like KBH:
If you’ve read this far, it means you don’t hate homebuilders right now. My opinion on homebuilders hasn’t changed at all since I bought TOL 3 weeks ago. You can read about my opinion on the entire industry here in my most excellent write-up on why I loved TOL:
With regard to KBH, KB Home (formerly Kaufman & Broad Home) has been one of the largest single-family homebuilders in California for some time. Since 1993, it has expanded into Nevada, Arizona, Colorado, New Mexico, Texas, Florida, Georgia, North Carolina, South Carolina, Illinois and Indiana. KBH mostly sells single-family detached homes. It generally constructs homes in medium-sized developments, close to major metropolitan areas, catering to first time and first move-up buyers. Like most major builders, it acts as general contractor for its communities, and hires subcontractors for all production work.
KBH builds homes. Homebuilders make money. Specifically, I like KBH because it makes lots of money and it is cheap. Just for fun, let’s compare TOL, a recent winner that I loved, with KBH. If you liked TOL, you’re gonna love KBH. Through the magic of $$$MR. MARKET$$$, you can look at them side by side:
Market Cap: TOL: 8.72B KBH:7.87B
Employees: TOL: 4,655 KBH: 6,000
Revenue (ttm): TOL: 4.69B KBH: 7.90B
EBITDA (ttm): TOL: 998.89M KBH:1.01B
Net Income (ttm): TOL: 566.91M KBH: 608.84M
P/E (ttm): TOL: 16.40 KBH: 11.55
PEG (5 yr expected):TOL: 0.83 KBH: 0.61
P/S (ttm): TOL: 1.92 KBH: 1.03
Hmmm…there’s no question that TOL was a $$$MR. MARKET$$$ winner. In fact had I not been asleep at the switch the other day, I would have sold it for a 15% gain when it hit my target 2 days ago. But never mind that. What have we here? Another company in the same industry that actually looks MORE attractive than TOL, from a valuation perspective. KBH has more employees than TOL. KBH has more revenues than TOL. KBH has more earnings than TOL. KBH’s Price to Sales ratio is ½ that of TOL’s and its P/E ratio is 11.5 compared to TOL’s 16.4.
So there you have it. KBH basically has proven that it can make more money than TOL, yet the stock market has not rewarded it as much as it has rewarded TOL. Stupid stupid stupid market.
True both TOL and KBH are great stocks to own. Looking backwards we can say that KBH is a much better value than TOL. But what is the story looking forwards $$$MR. MARKET$$$? Looking ahead, Wall Street offers TOL a forward P/E of 11 while KBH only has a forward P/E of 7.5. What did Rodney Dangerfield say about respect? Remember there is an “E” in “P/E” and as long as the “E” keeps growing, the stock price HAS TO GO UP!
Where will the earnings come from? KBH's recent results suggest to us that the company's California division, which accounts for about one-third of overall sales, continues to deliver very compelling profit margins. At the same time, the company continues to increase its land bank, and is delivering homes on that land in similarly rapid fashion. In fact, management recently said it plans for its entire inventory balance at May 31 to flow through its income statement over the next 18 months, or by FY 06 (Nov.) year end. In FY 04 (Nov.), KBH derived 32% of homebuilding sales (on a dollar basis) in California, 22% in the Southwest, 20% in the Central U.S., 12% in the Southeast, and 14% in France.
That’s right…France. If you’re worried about the real estate bubble, then KBH is a great company to own. KBH is a regionally diversified operation. It builds homes in 12 states, and, beyond that, sports both a mortgage unit and a successful international subsidiary, as well: The firm's Kaufman & Broad S.A. division is among the leading homebuilders in France. Besides Freedom Fries, France is also moving the lumber accounting for 15% of KB's "units delivered" in fiscal 2004. KB Home has been there for 35 years and is its largest builder. New French orders rose 61% in the first quarter. That international diversification should help insulate KB a bit -- if there really is a U.S. real estate bubble and if it really does burst. Also, one thing working in KB's favor is its policy of not building homes until they're sold. It doesn't have to worry about inventory it can't sell. And buyers decide which features they want, so KB doesn't end up discounting unwanted amenities.
Don’t forget that this country always has new homebuyers. Immigration is fueling demand. Each year, 1.2 million people move to the U.S. More immigrants came to the U.S. in the 1990s than any other decade in the past century, In the first 10 years, their home-ownership rate is less than 10%. That rises to 50% in the next 10 years. KB is rolling out an expanded marketing program geared to Spanish-speaking households. The program covers everything from color preferences of Hispanics to how their families are structured and what their motivations are.
KBH has already made strides toward serving immigrant needs. Its Web site is translatable into four non-English languages, including Spanish, Mandarin and Tagalog.
In addition, KB has a Hispanic director of marketing and a staff of bilingual employees.
Along with geographic and cultural diversity, KBH is tapping into TOL’s marketplace by establishing some luxury communities, which are less sensitive to short term changes in the economy.
In its earnings announcement, KB reported that net orders rose 15% during the quarter and that its "backlog" (i.e., units ordered, but not yet delivered) increased to the tune of 52%, a figure that reflects nearly $7 billion in future revenue for the firm. "Supply is not keeping up with demand," said Jeff Mezger, KB Home's chief operating officer. That's helped all builders. Beyond that, KB Home has taken steps to grow even faster than the industry.
KBH has more than doubled the number of major markets where it builds - from 17 to 36 - in the past three years.
Their business plan seems very prepared for the inevitable rise in interest rates. "There's no question when rates rise enough, they impact buying power," Mezger said. "But if interest rates rise 1% or 2%, we don't see much impact on our business. And we don't see rates moving more than that the next couple of years." Land constraints in many markets will continue to put upward pressure on home prices even after mortgage rates rise and demand slows.
The rate increases have been awfully slow. If they go back up as slowly as they have gone down, KBH should have years and years of prosperity. Look at this 5 year T-bill chart:
And the fundamentals of housing -- the health of the economy and demographics -- argue against a widespread drop in demand. Faster job and income growth should help to offset the drag of higher borrowing costs. Plus, even though a record 69.1% of Americans owned their homes at the end of 2004, demand will still be supported by baby boomers and immigrants.
Enough of the soft stuff. Let’s get to the math. Last quarter, KBH posted net income of $181.5 million, or $2.06 a share, for the three months ended May 31, up from $102.1 million, or $1.20 a share, for the same period last year. ANAL-ysts tracked had a consensus estimate of $1.78 a share.
Revenue jumped 36% to $2.13 billion. Unit deliveries leapt 20%. The average selling price climbed 14% to $247,800.
As of May 31, the company's backlog of future revenue had climbed 52% to $6.79 billion. Each of the Company's geographic regions generated higher year-over-year backlog for the second quarter of 2005 compared to the second quarter of 2004, measured in both dollar value and unit volume. Total net orders rose 15% to 12,290, the highest quarterly level in the company's history. As for returns on investment, KBH’s relatively high forecasted inventory turnover ratio compensates for its relatively low, but rapidly rising, profit margins.
KB Homes raised its 2005 earnings forecast to $9 a share from previous guidance of $7.88. The new number represents a 58% jump from the $5.70 a share KB Home earned in 2004.
After raising his earnings estimates and pushing the target price to $82 from $70, Bank of America's Daniel Oppenheim wrote, "There may still be upside to estimates given that both our estimate and management guidance represent lower earnings growth than we've seen in the first two quarters of the year. [Also], we expect the company to update its previously stated goal of $10.00 per share in earnings in 2007 and expect management will indicate that 2007 earnings are likely to be significantly above that." Doy…ya think Daniel? My, you are being really bold with these prognostications, especially when KBH is going to do almost $10/share in 2005, 2 years ahead of schedule! They can do this with a mere upside surprise of 10%. In fact, KBH has bested the consensus earnings estimate in each of the past five reporting periods by an average of 10.33 percent.
Daniel, go get me a beer. Let $$$MR. MARKET$$$ show you how to predict earnings. Helped considerably by favorable pricing trends, gross margin growth in FY 05 will be approximately 320 basis points. 2005 revenues for KBH are going to hit $9.3 billion which would translate to earnings of $9.33/share. Remember, it takes 6 to 9 months to build a house. These numbers are practically baked in already.
How can $$$MR. MARKET$$$ be so bold? This one is a layup. KBH is growing at 60% per year, vs. the rest of the industry growing at only 20%. Sure there will be some mean reversion, but I wouldn’t expect KBH to underperform the industry. KBH’s earnings in 2006 will be more than $11.00/share.
Return on assets are 10%. Return on Equity is 26%. These numbers are about the same as TOL’s. Just like TOL, KBH is an earnings machine. At today’s P/E ratio of 11.5, my projected earnings would send KBH’s stock price to a price of 107.29, which is well past my target sell price.
Here’s what the boss has to say: "Our outstanding second quarter performance underscores the strength of KB Home's geographically diverse operations," said Bruce Karatz, chairman and chief executive officer. "Consumer demand in our markets remains vibrant, fueling strong growth in unit deliveries and selling prices, and driving the 36% increase in second quarter revenues to more than $2.1 billion. And the significant improvement in our margins during the quarter amplified the impact of top-line growth to produce a 78% increase in year-over-year second quarter net income. Our ability to capitalize on these strong market conditions strengthens our optimism for the balance of 2005."
"Housing demand in our major markets during the second quarter continued to outstrip supply, producing the highest number of net new orders for any single quarterly period in our Company's history," said Karatz. "Backlog at the end of the quarter was up across the board, both in units and dollars, in all five of our geographic regions. We now have approximately $6.79 billion of future revenues in the pipeline, a solid platform for continued growth through the second half of 2005.”
"As our results demonstrate, KB Home continues to deliver on its commitment to increase shareholder value," said Karatz. "Our business is clearly benefiting from a strong focus on strategic market positions, a proven operating model and organic growth. Our recent 2-for-1 stock split is tangible evidence of the confidence our board of directors has in the future of our business. And, with excellent first half financial results and record backlog levels supporting our projections, we are comfortable raising our earnings guidance for 2005 to $9.00 per diluted share. This new guidance represents a 14% improvement from our previous estimate and a 58% increase over our 2004 earnings per share of $5.70."
The way I boil this one down is that I had a fun ride holding TOL. My thinking is, why not take my profits in TOL and roll it into KBH? KBH is everything that TOL is, only it’s a better value. It has the same upside potential with lower downside risk. So, I’m selling TOL and buying KBH, thus upgrading my portfolio.
I am HUGE!!
$$$MR. MARKET$$$
www.mrmarketishuge.com
If you liked this write-up, please let me know. If you did not like this write up, please let me know.
Yes, that’s right. $$$MR. MARKET$$$ just cannot get enough of homebuilders. Is it the smell of wood? What am I, wood? Is it the “Ka-Knock Ka-Knock Ka Knock” of that lonely hammer echoing across the newly razed farmlands? Of course not. Is it the angry rumble of the hungry backhoe as it digs up the old trashdumps to make a new foundation for some 3 yr old’s playroom? Not exactly. Is it those lean strapping young lads with their tan muscular bodies hauling shingles up to the roof? Umm…the thought never crossed my mind.
How many times do I have to repeat myself?? It’s all about earnings earnings earnings.
Today I bought KB Homes (KBH) at 82.59. I will sell it in 4 to 6 weeks at 95.17. Here’s why I like KBH:
If you’ve read this far, it means you don’t hate homebuilders right now. My opinion on homebuilders hasn’t changed at all since I bought TOL 3 weeks ago. You can read about my opinion on the entire industry here in my most excellent write-up on why I loved TOL:
With regard to KBH, KB Home (formerly Kaufman & Broad Home) has been one of the largest single-family homebuilders in California for some time. Since 1993, it has expanded into Nevada, Arizona, Colorado, New Mexico, Texas, Florida, Georgia, North Carolina, South Carolina, Illinois and Indiana. KBH mostly sells single-family detached homes. It generally constructs homes in medium-sized developments, close to major metropolitan areas, catering to first time and first move-up buyers. Like most major builders, it acts as general contractor for its communities, and hires subcontractors for all production work.
KBH builds homes. Homebuilders make money. Specifically, I like KBH because it makes lots of money and it is cheap. Just for fun, let’s compare TOL, a recent winner that I loved, with KBH. If you liked TOL, you’re gonna love KBH. Through the magic of $$$MR. MARKET$$$, you can look at them side by side:
Market Cap: TOL: 8.72B KBH:7.87B
Employees: TOL: 4,655 KBH: 6,000
Revenue (ttm): TOL: 4.69B KBH: 7.90B
EBITDA (ttm): TOL: 998.89M KBH:1.01B
Net Income (ttm): TOL: 566.91M KBH: 608.84M
P/E (ttm): TOL: 16.40 KBH: 11.55
PEG (5 yr expected):TOL: 0.83 KBH: 0.61
P/S (ttm): TOL: 1.92 KBH: 1.03
Hmmm…there’s no question that TOL was a $$$MR. MARKET$$$ winner. In fact had I not been asleep at the switch the other day, I would have sold it for a 15% gain when it hit my target 2 days ago. But never mind that. What have we here? Another company in the same industry that actually looks MORE attractive than TOL, from a valuation perspective. KBH has more employees than TOL. KBH has more revenues than TOL. KBH has more earnings than TOL. KBH’s Price to Sales ratio is ½ that of TOL’s and its P/E ratio is 11.5 compared to TOL’s 16.4.
So there you have it. KBH basically has proven that it can make more money than TOL, yet the stock market has not rewarded it as much as it has rewarded TOL. Stupid stupid stupid market.
True both TOL and KBH are great stocks to own. Looking backwards we can say that KBH is a much better value than TOL. But what is the story looking forwards $$$MR. MARKET$$$? Looking ahead, Wall Street offers TOL a forward P/E of 11 while KBH only has a forward P/E of 7.5. What did Rodney Dangerfield say about respect? Remember there is an “E” in “P/E” and as long as the “E” keeps growing, the stock price HAS TO GO UP!
Where will the earnings come from? KBH's recent results suggest to us that the company's California division, which accounts for about one-third of overall sales, continues to deliver very compelling profit margins. At the same time, the company continues to increase its land bank, and is delivering homes on that land in similarly rapid fashion. In fact, management recently said it plans for its entire inventory balance at May 31 to flow through its income statement over the next 18 months, or by FY 06 (Nov.) year end. In FY 04 (Nov.), KBH derived 32% of homebuilding sales (on a dollar basis) in California, 22% in the Southwest, 20% in the Central U.S., 12% in the Southeast, and 14% in France.
That’s right…France. If you’re worried about the real estate bubble, then KBH is a great company to own. KBH is a regionally diversified operation. It builds homes in 12 states, and, beyond that, sports both a mortgage unit and a successful international subsidiary, as well: The firm's Kaufman & Broad S.A. division is among the leading homebuilders in France. Besides Freedom Fries, France is also moving the lumber accounting for 15% of KB's "units delivered" in fiscal 2004. KB Home has been there for 35 years and is its largest builder. New French orders rose 61% in the first quarter. That international diversification should help insulate KB a bit -- if there really is a U.S. real estate bubble and if it really does burst. Also, one thing working in KB's favor is its policy of not building homes until they're sold. It doesn't have to worry about inventory it can't sell. And buyers decide which features they want, so KB doesn't end up discounting unwanted amenities.
Don’t forget that this country always has new homebuyers. Immigration is fueling demand. Each year, 1.2 million people move to the U.S. More immigrants came to the U.S. in the 1990s than any other decade in the past century, In the first 10 years, their home-ownership rate is less than 10%. That rises to 50% in the next 10 years. KB is rolling out an expanded marketing program geared to Spanish-speaking households. The program covers everything from color preferences of Hispanics to how their families are structured and what their motivations are.
KBH has already made strides toward serving immigrant needs. Its Web site is translatable into four non-English languages, including Spanish, Mandarin and Tagalog.
In addition, KB has a Hispanic director of marketing and a staff of bilingual employees.
Along with geographic and cultural diversity, KBH is tapping into TOL’s marketplace by establishing some luxury communities, which are less sensitive to short term changes in the economy.
In its earnings announcement, KB reported that net orders rose 15% during the quarter and that its "backlog" (i.e., units ordered, but not yet delivered) increased to the tune of 52%, a figure that reflects nearly $7 billion in future revenue for the firm. "Supply is not keeping up with demand," said Jeff Mezger, KB Home's chief operating officer. That's helped all builders. Beyond that, KB Home has taken steps to grow even faster than the industry.
KBH has more than doubled the number of major markets where it builds - from 17 to 36 - in the past three years.
Their business plan seems very prepared for the inevitable rise in interest rates. "There's no question when rates rise enough, they impact buying power," Mezger said. "But if interest rates rise 1% or 2%, we don't see much impact on our business. And we don't see rates moving more than that the next couple of years." Land constraints in many markets will continue to put upward pressure on home prices even after mortgage rates rise and demand slows.
The rate increases have been awfully slow. If they go back up as slowly as they have gone down, KBH should have years and years of prosperity. Look at this 5 year T-bill chart:
And the fundamentals of housing -- the health of the economy and demographics -- argue against a widespread drop in demand. Faster job and income growth should help to offset the drag of higher borrowing costs. Plus, even though a record 69.1% of Americans owned their homes at the end of 2004, demand will still be supported by baby boomers and immigrants.
Enough of the soft stuff. Let’s get to the math. Last quarter, KBH posted net income of $181.5 million, or $2.06 a share, for the three months ended May 31, up from $102.1 million, or $1.20 a share, for the same period last year. ANAL-ysts tracked had a consensus estimate of $1.78 a share.
Revenue jumped 36% to $2.13 billion. Unit deliveries leapt 20%. The average selling price climbed 14% to $247,800.
As of May 31, the company's backlog of future revenue had climbed 52% to $6.79 billion. Each of the Company's geographic regions generated higher year-over-year backlog for the second quarter of 2005 compared to the second quarter of 2004, measured in both dollar value and unit volume. Total net orders rose 15% to 12,290, the highest quarterly level in the company's history. As for returns on investment, KBH’s relatively high forecasted inventory turnover ratio compensates for its relatively low, but rapidly rising, profit margins.
KB Homes raised its 2005 earnings forecast to $9 a share from previous guidance of $7.88. The new number represents a 58% jump from the $5.70 a share KB Home earned in 2004.
After raising his earnings estimates and pushing the target price to $82 from $70, Bank of America's Daniel Oppenheim wrote, "There may still be upside to estimates given that both our estimate and management guidance represent lower earnings growth than we've seen in the first two quarters of the year. [Also], we expect the company to update its previously stated goal of $10.00 per share in earnings in 2007 and expect management will indicate that 2007 earnings are likely to be significantly above that." Doy…ya think Daniel? My, you are being really bold with these prognostications, especially when KBH is going to do almost $10/share in 2005, 2 years ahead of schedule! They can do this with a mere upside surprise of 10%. In fact, KBH has bested the consensus earnings estimate in each of the past five reporting periods by an average of 10.33 percent.
Daniel, go get me a beer. Let $$$MR. MARKET$$$ show you how to predict earnings. Helped considerably by favorable pricing trends, gross margin growth in FY 05 will be approximately 320 basis points. 2005 revenues for KBH are going to hit $9.3 billion which would translate to earnings of $9.33/share. Remember, it takes 6 to 9 months to build a house. These numbers are practically baked in already.
How can $$$MR. MARKET$$$ be so bold? This one is a layup. KBH is growing at 60% per year, vs. the rest of the industry growing at only 20%. Sure there will be some mean reversion, but I wouldn’t expect KBH to underperform the industry. KBH’s earnings in 2006 will be more than $11.00/share.
Return on assets are 10%. Return on Equity is 26%. These numbers are about the same as TOL’s. Just like TOL, KBH is an earnings machine. At today’s P/E ratio of 11.5, my projected earnings would send KBH’s stock price to a price of 107.29, which is well past my target sell price.
Here’s what the boss has to say: "Our outstanding second quarter performance underscores the strength of KB Home's geographically diverse operations," said Bruce Karatz, chairman and chief executive officer. "Consumer demand in our markets remains vibrant, fueling strong growth in unit deliveries and selling prices, and driving the 36% increase in second quarter revenues to more than $2.1 billion. And the significant improvement in our margins during the quarter amplified the impact of top-line growth to produce a 78% increase in year-over-year second quarter net income. Our ability to capitalize on these strong market conditions strengthens our optimism for the balance of 2005."
"Housing demand in our major markets during the second quarter continued to outstrip supply, producing the highest number of net new orders for any single quarterly period in our Company's history," said Karatz. "Backlog at the end of the quarter was up across the board, both in units and dollars, in all five of our geographic regions. We now have approximately $6.79 billion of future revenues in the pipeline, a solid platform for continued growth through the second half of 2005.”
"As our results demonstrate, KB Home continues to deliver on its commitment to increase shareholder value," said Karatz. "Our business is clearly benefiting from a strong focus on strategic market positions, a proven operating model and organic growth. Our recent 2-for-1 stock split is tangible evidence of the confidence our board of directors has in the future of our business. And, with excellent first half financial results and record backlog levels supporting our projections, we are comfortable raising our earnings guidance for 2005 to $9.00 per diluted share. This new guidance represents a 14% improvement from our previous estimate and a 58% increase over our 2004 earnings per share of $5.70."
The way I boil this one down is that I had a fun ride holding TOL. My thinking is, why not take my profits in TOL and roll it into KBH? KBH is everything that TOL is, only it’s a better value. It has the same upside potential with lower downside risk. So, I’m selling TOL and buying KBH, thus upgrading my portfolio.
I am HUGE!!
$$$MR. MARKET$$$
www.mrmarketishuge.com
If you liked this write-up, please let me know. If you did not like this write up, please let me know.
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