KB Home’s fiscal year ended in November 2012, and the company has just released its report for the year as well as for the fourth fiscal quarter. For the year, revenue was up 19% from fiscal year 2011and though earnings were negative the company’s net loss was only a third of what it had been in the previous fiscal year. The fourth quarter saw high sales, likely due to seasonal factors, and profits; however, KB Home had actually had higher earnings in the fourth quarter of the last fiscal year.
Wall Street analysts seem to believe that continued strength in the housing market will help KB Home continue to improve its bottom line. Consensus has the company breaking into the black in the current fiscal year ending in November 2013, with 12 cents in EPS expected for the year. That generates a very high current-year P/E, but the sell-side then expects even better numbers on a forward basis and so the forward P/E multiple is 14. If the company does meet that trajectory, it wouldn’t need to continue growing much from that point; of course, there’s good reason to doubt that analyst forecasts will turn out to be right. A number of investors apparently don’t believe in KB Home’s prospects: 42% of the outstanding shares were held short as of the most recent data, despite the fact that the stock price has more than doubled in the last year as the market sees at least something of a housing recovery. Of course, buying a homebuilder does carry considerable macro risk as well, as demonstrated by the beta of 2.2.
Hedge funds generally weren’t very excited about KB Home at the end of the third quarter; of course, of Citadel has been buying in the last couple months, so could they. Our database shows that billionaire Steve Cohen’s SAC Capital Advisors had been buying the stock, though its position was fairly small compared to the fund’s size (see Cohen’s favorite stocks). The largest position in our database belonged to Odey Asset Management Group. This hedge fund, managed by Crispin Odey, more than tripled its stake in KB Home during the third quarter to a total of 5.1 million shares. This made it one of the ten largest holdings by market value in the fund’s 13F portfolio (find more of Odey’s stock picks).
Other homebuilding stocks include Lennar Corporation (NYSE:LEN), PulteGroup, Inc. (NYSE:PHM), D.R. Horton, Inc. (NYSE:DHI), and Toll Brothers Inc (NYSE:TOL). These stocks are also all up strongly in the last year, and have reported strong revenue growth; Lennar and Toll Brothers in particular had sales come in at least 30% higher in their most recent quarter compared to the same period in the previous fiscal year. These two peers are then priced at over 20 times forward earnings estimates as the market expects continued high growth, while PulteGroup and DR Horton have forward P/Es in the teens. Of course, these projections are likely based on the same macro thesis that has KB Home at 14 times forward earnings estimates, and it makes sense for that company to trade at a discount since it’s currently unprofitable.
KB Home is obviously dependent on further improvement in the housing market- likely more so than many of its peers. As a result Citadel’s buying the stock is interesting. However, we still don’t feel comfortable going with KB Home on value terms and think any investment would be speculative. If an investor does feel strongly about a housing recovery, then it would be wise to review KB Home alongside alternatives in the industry.
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