KB Homes Wows With Results, But Is the Stock Too Dangerous?

Source: Thinkstock

Source: Thinkstock

KB Home (NYSE:KBH) is one of my favorite stocks for a housing recovery. But it is dangerous because if there is not a housing rebound or another large sector decline, it could get crushed. This is because the company is engaged in homebuilding activities in specialized markets in the United States. It constructs and sells various style homes, including attached and detached single-family residential homes, townhomes, and condominiums primarily for first-time, move-up, and active adult homebuyers. I highlight this because with our changing demographic in the United States, it is likely that these are the types of buyers that will drive the housing rebound when it kicks into full swing.

I should also point out that in addition to the homebuilding side of the company, it also provides property and casualty insurance, as well as earthquake, flood, and personal property insurance to its homebuyers, as well as provides title services. It has operations in Arizona, California, Colorado, Florida, Maryland, Nevada, New Mexico, North Carolina, Texas, and Virginia. The purpose of this article is to go over what I consider to be a blowout quarter from the company, but to also discuss the prospects for the stock. The stock is not cheap, trading at a premium multiple of 26 times earnings and only paying a 0.6 percent dividend yield. But does the stock deserve this? An analysis of the company’s performance and future potential is warranted.

No matter how you slice it, this quarter was fantastic. The company saw total revenues increase 8 percent to $565.0 million from $524.4 million in the prior-year quarter due to growth in the company’s housing revenues from higher average selling prices. One thing that surprised me was reduced volume. The company delivered 1,751 homes in its latest quarter, compared to 1,797 homes in the second-quarter of 2013.

However, the overall average selling price of $319,700 rose $29,300, or 10 percent, from the second-quarter of 2013, marking the seventh consecutive quarter of double-digit year-over-year percentage growth in the company’s average selling price. Average selling prices were higher across all of the company’s homebuilding regions with increases ranging from 9 percent in the Southeast region to 23 percent in the Southwest region. Further, homebuilding operating income increased to $34.3 million, up $25.6 million from $8.7 million in the year-earlier quarter. As a percentage of homebuilding revenues, operating income rose 440 basis points to 6.1 percent, compared to 1.7 percent for the 2013 second-quarter, and increased 210 basis points compared to 4.0 percent for the 2014 first-quarter.