I am not sure if the phrase “rags to riches” would be a right pick to describe the US housing market; however, my point is that this sector has exhibited an unimaginable growth trajectory since the massive fall during the 2008 recession. This CNN money article gives us an insight into the strong recovery of home prices that touched 8.1% in January. Besides promoting competition, growth in an industry also facilitates growth of constituting companies owing to a presence of higher demand. KB Home (NYSE:KBH) also grabbed its share of the pie as it reported robust Q1 results.
A revenue increase of 59% from the previous year quarter helped the company to narrow down its net loss to $12.46 million as compared to a net loss of $45.8 million in the previous year quarter. KB Home’s core strength lies in the first-time home buyers segment and it distinguishes itself from other players in the homebuilding segment by offering “Built to order” homes at reasonable prices. As per this report, it can be conclusively said that customers are looking for new homes that are built as per their preferences. The spring season is a critical phase for home builders as demand for homes rallies during this time, which tends to normalize the market supply and might give birth to a demand-supply gap in some cases.
The recovery phase is here to stay
There has been some apprehension among analysts about the durability of this housing recovery phase and KB Home (NYSE:KBH)’s earnings call seemed like a befitting answer to such doubts. Management of the company pointed out that the 33 cities they are present in are all witnessing this phase wherein there is an upward price movement along with a spur in demand. Investors would appreciate the fact that this was the 11th quarter where the average selling price has increased on a year-over-year basis. In the 1st quarter, ASP stood at $271,000 and is anticipated to reach $280,000 for the year 2013 marking a rise of 14% over 2012.
A look at industry rivals
One of the biggest rivals and nation’s leading homebuilders Lennar Corporation (NYSE:LEN) trades at a price twice of KB Home, having a market cap of a whopping $ 8 billion. In its first quarter, Lennar generated net earnings of $57.5 million on revenues of $989.9 million. The company enjoys competitive advantage in construction of single family homes. In terms of average selling price for the quarter, KB Home (NYSE:KBH) beat Lennar Corporation (NYSE:LEN) as its ASP rose approximately 24% in comparison to a rise of 9% experienced by Lennar and that can be attributed to KB’s strategic investment in dynamic housing markets and building homes in accordance with customer preferences.
Another major player in the homebuilding industry is Toll Brothers Inc (NYSE:TOL) that has branded itself as a luxury homemaker. The first quarter turned out be a dynamic one as the company reported net income of $4.04 million, or $3.03 per share as compared to a net loss of $2.8 million in the previous year quarter. Since Toll Brothers Inc (NYSE:TOL) operates in luxury homes segment, it is able to dodge competition from local homebuilders. Hence, it can be said that they have taken a particular piece of the housing pie under their command and are doing a great job in it.
KB Home is an attractive pick
KB Home (NYSE:KBH) is apparently the smallest player in the housing industry and believe it or not, this is what induces me to place a bet on the stock. The stock has given a total return of 130.5% over the last year which is more than double its peers. Even though the company has not been able to generate positive EPS, it has been successful in creating value for its shareholders via notable capital appreciation.
Management of the company has planned a sequential increase in community count over the remaining quarters of 2013. The average community count declined in the first quarter of 2013 by 11% however, as a result of the housing recovery, absorption rates touched a new high of 56% to 9.7 net orders per community. Increasing community count on a sequential basis will be beneficial because it will allow the company to meet excessive demand during say, the spring season sale, and also spare it from unnecessary inventory.
The bottom line
Something that really becomes a challenge for major companies during periods of high demand is proper cost management because high demand leads to higher production as well as higher indirect expenses to support production. KB Home (NYSE:KBH) has done a phenomenal job on this front as its incremental SG&A expense per dollar of extra revenue stood at approximately $0.053.
KB Home might not be the biggest player in the housing industry; however, in terms of shareholder value creation it definitely scores high and it will make sense to have this stock in your portfolio.
The article This Is Your Window of Opportunity! originally appeared on Fool.com and is written by Mihir Mehta.
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