The Important Geographical Risks in Home Builders: KB Home (KBH) and More

Brookfield’s total debt-to-equity ratio of 1.45 is healthy, and shows that in addition to greater geographical diversification, its balance sheet carries less risk than KB Home’s. On the sales side, the company boasts a gross margin of 27.2% and an EBIT margin of 15.7%. These margins are significantly higher than those of the other two firms mentioned here. This positive news needs to be tempered by Brookfield’s relatively low return on investment of 3.1%, which suggests that the company could be using its assets more effectively. Brookfield offers a healthy degree of geographical diversification and is a good long-term investment.

Lennar Corporation (NYSE:LEN) is an interesting company with some encouraging developments. It’s experimenting with multigenerational housing. As the number of workers per non-working individual increases, America will have an increasing dependency ratio. In a macro sense, the nation will need to use its resources more effectively, and Lennar’s multigenerational homes might make a great fit.

Lennar focuses on America’s coasts, but it is in a better situation than KB Home. Its total debt-to-equity ratio of 1.35 is on par with Brookfield and does not imply the same risks as KB Home’s. Lennar’s EBIT margin of 7.7% is half of Brookfield’s, but nevertheless, both companies are profitable.

KB Home argues that its  temporary unprofitability is just a period of strong investment. Lennar’s ROI of 8.9% shows that some builders are able to remain quite profitable, even while they come out a recession.

Conclusion

Evaluating risks and uncertainty is a critical part of investing. KB Home’s high debt load and concentration in volatile markets gives the company hidden risks. As the market improves, it will be fine — but what will happen in the next downturn?

Brookfield Residential Properties offers greater diversification throughout Canada and the U.S., along with a more manageable debt load. Lennar offers unique multigenerational housing plans and further diversification with its markets in Chicago, Washington State, and the Northern parts of the East Coast. These two companies are two good investments to consider.

The article The Important Geographical Risks in Home Builders originally appeared on Fool.com and is written by Joshua Bondy.

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