Cancellations Drive Down Net New Home Orders: KBH
A homebuilder has some numbers out. “Home builder KB Home on Wednesday said its fiscal first-quarter profit rose 42 percent, partly on higher home prices, and maintained its outlook for the year, despite a fall in new orders. The Company generated 8,719 net orders during the quarter ended February 28, 2006, a decrease of 12% from the 9,901 net orders posted in the first quarter of 2005.”
“‘After several years of exceptional growth and rapid price escalation in many housing markets, it is likely that we will see some markets pull back this year from their recent pace,’ said CEO Bruce Karatz. ‘Our gross orders, which were only slightly below the year-earlier quarter, reflected steady demand. However, higher cancellation rates, which rose to more normalized levels, adversely impacted our net order comparison in the first quarter. Since we are just entering our prime selling season, it is still too early in the year to forecast the longer-term sales trend.’”
“‘Nationally, it is clear that some housing markets have moderated from the over-heated and, in some cases, speculative pace of growth of the past few years,’ said Karatz. ‘There are signs of cooling in the hottest markets on both coasts and a shift in investor activity from buying to selling, resulting in less demand and increased supply in certain markets.’”
“‘We endeavor to create value for our shareholders in a number of ways (including) an aggressive share repurchase program,’ said Karatz. ‘Over the past two quarters, we have opportunistically repurchased four million shares of common stock, and we retain the authority, under our current share repurchase program, to repurchase an additional eight million shares.’”
“The Company repurchased two million shares of its common stock during the first quarter of 2006 at an aggregate price of $154.4 million. ‘We expect to use our strong cash-generating abilities in the future..to repurchase additional company common stock if market conditions and buying opportunities warrant it,’ Karatz said.”
The firms cash position is less than half of what it was one quarter before, at $71 million. The accounts payable is $945 million, versus $722 million a year before. They are basically borrowing to buy back the stock.
Revenue was up by $559 million, yet net income rose only $52 million. Of course, KBH was able to capitalize $46.8 million of the total interest of $51.5 million, meaning it was added to inventory instead of reducing the net income. About that inventory: it grew 48% over the past year; from $4.7 billion to $6.9 billion.
New orders were down significantly on the west coast and in the southwest and central regions, and flat in the southeast. The only sigificant increase in new orders was in France.
Revenue was up by $559 million, yet net income rose only $52 million. Less than 10%. I don’t think these guys have as much profit sitting on the shelf as some believe. I come up with 7.9% net from gross revenue.
they’re deferring 47million in capitalized interest expense. it’s being added to the basis of land and work-in-process, which will dampen further profit numbers over the next 12 months. had they taken the hit now the rate of return on the 559 million increase is closer to .9%. they played games to show positive bottom line to keep their lines of credit from getting nervous
What are KBH’s $568m of receivables from?
“‘We endeavor to create value for our shareholders in a number of ways (including) an aggressive share repurchase program,’ said Karatz. ‘Over the past two quarters, we have opportunistically repurchased four million shares of common stock, and we retain the authority, under our current share repurchase program, to repurchase an additional eight million shares.’”
Could this herald the onset of more pump and dump, especially given the glorious-sounding headline numbers (fiscal first-quarter profit rose 42 percentr)?
The Company repurchased two million shares of its common stock during the first quarter of 2006 at an aggregate price of $154.4 million.
Whoops! $154.4M/2M = $77.20 a share. Current price is $64.59. That’s about $12.50*2M or $25 million bucks they pissed away in the stock market this quarter. There’s really no way to sugar-coat it.
If “they” didn’t buy back those shares they’d be out far more. By “they” I mean of course the board who also hold shares.
Nice of them to use the company assets to prop up the share price…
It’d be interesting to see if somebody nails them on this in the CC tomorrow. “I see you are prepared to buy back another eight million shares of the stock. Do you think the stock has bottomed? Are we looking at a potential hundred-million dollar loss in capitalization in the next quarter?”
You know the drill: Buy back the stock as the insiders cash in their huge options.
KBH is buying back shares at the very same time Karatz is selling. Something doesn’t add up if you happen to be long KBH.
This buy-back, just as all buy-backs, is a scam. They buy the shares back and then allow employees to excersice stock options. The net effect to the market is a zero sum gain, except to insiders who profit handsomely!
exactomundo, crispy!
A buyback concentrates the company’s net equity over a small share base. This would appear to serve two useful purposes for insiders:
1) Momentum traders are more likely to take the bait after a buyback helps to pump up the share price. (I notice the HB stock prices have been very resilient lately, despite the steady drumbeat of bad news on order cancellations, rising inventories, etc.)
2) Part of this equity concentration helps push the big boys’ options grants into the money, creating a nice opportunity for them to cash in their chips.
This bodes well for anyone with long-dated puts. More cash extraction by the insiders today = bigger hit to the share price tomorrow when the scam comes to fruition…
‘Our gross orders, which were only slightly below the year-earlier quarter, reflected steady demand. However, higher cancellation rates, which rose to more normalized levels, adversely impacted our net order comparison in the first quarter. Since we are just entering our prime selling season, it is still too early in the year to forecast the longer-term sales trend.’”
How does gross orders “reflecting steady demand” jive with “higher cancellation rates adversely impacting net orders”? Huh?
This is why they push those contracts onto buyers they KNOW can’t close!!!! To get those gross orders!!!!
Catherine
At some point can’t the buyers demand a clause in their contract that it is contingent on the sale of their exsisting home? If they offer new cars and other up grades why not this?
I’m sure they will and possibly already have. If sales continue to fall off a cliff, to sign contracts, they will most likely do this very thing.
They did not present cancellation numbers, something that would almost certainly show high double digit gains, OR MORE.
Don’t believe anything KB says. They are the most corrupt home builder on the planet. Ask anyone who had dealt with them. They have a site for them called KBHSUCKS. It is filled with unhappy buyers and others who have dealt with them. They recently lost a lawsuit (classaction) wherein they had a clause in the contract that the buyer waived all rights to sue for construction defects. Imagine that!
Builderspeak…
Good one. A half-million-dollar-each version of the infamous Miniscribe brick-in-a-box accounting scandal.
Good one. A half-million-dollar-each version of the infamous Miniscribe brick-in-a-disk-drive-box accounting scandal.
OK peeps, here it is. This is from Scott Reamer, a hedge fund guy in Denver. My comments at the end
John was just relaying a real estate anecdote to the rest of us on the trading desk and it paralleled several other stories i have heard first hand from other parts of the US.
The essence of the stories are similar: sellers of houses or condos that have been on the market for 6-12 months are seeing some traffic but they are not seeing LOWER prices being offered for their properties. They are getting NO prices. That is, zero bids. This despite 20-30% reductions in asking price.
You read that correctly. There is NO market.
Essential to any negotiated market’s stability is that there be a reasonably healthy liquidity involved so that in times of stress, the marginal buyer or seller can determine price discovery. We are seeing increased examples of situations in which there is simply no market. When real estate association economists tell you that the real estate market will not collapse and will simply revert to normal growth rates by declining a few %, they are decidedly not taking in to account that there is simply NO market.
In order to get a 5-10% decline in real estate values, you have to have a transaction. In certain markets and certain neighborhoods, there simply isn’t a market. That has potentially massive implications for housing prices.
All I have to say is to the wannabe “investors” who infect this blog (sorry, I cannot conceal my contempt for people who do this, at least with the idea of “flipping” or gouging to future buyers), ladies and gentlemen, start your engines. Better get dem puppies sold while you still have some profit in em. I know you think you all rule the world because you have a mullet in these properties paying the mortgage but a housing bust will have wide implications across the entire consumer economy and you may find that da cash ain’t flowin no mo. Know what I mean? Didn’t think so . . .
Guess that means there’s a pretty big spread between the bid and the ask price, and a large block for sale of the ask side.
“on” the ask side.
txchick…
why am I laughing so hard??? This is EXACTLY what I’ve been trying to tell the poor schmucks who tell me that the market is reverting back to a normal “buyer’s market”…
WHAT FREAKIN’ MARKET???? When there is NO RECENT CLOSED SALES to run appropriate comps on, how the hell do you convince a seller to lower the price??? They all think you hang the moon on their closet organizers and workbench in the garage!
So the pain gains momentum, and there’s no reasonable way to convince sellers that they NEED to get BELOW everyone else’s current list price.
Catherine
They are “testing” the market and the house sits while the future for sales gets worse.
Txchic
I am with you. I am absolutely disgusted with the speculators and investors and their greed. I get a real kick out of some speculator getting stuck with the house in the least desirable spot in a new development. You know no one is going to buy it or rent it for that matter. There is a house on my way to work that had a FSBO sign in the windows as soon as it as completed. Located at the entrance of the “new” development, 20 ft from a 5 lane 45 mile an hour busy road and backing to the parking lot of an apartment complex. I pass it every day on my way to work and there it sits. Ha Ha Ha!
I really like how the builders save the best lots for last. Them flippers is smart, they get in early.
That’s really cool. It reminds me of where we are right at the moment — think Dow Jones Industrial Average at about 12 noon on Black Monday (October 19, 1987) with no buyers willing to pay what the deperate mob of sellers believes their overvalued shares to be worth.
There are two main differences:
1) As I often point out here, housing markets crash in geologic time (look inside of the jacket on John McPhee’s book Basin and Range if you don’t get this).
2) There are no circuit breakers, electronic program trading, or Plunge Protection Team standing ready to stop the housing market free fall.
Only Fannie is standing there, and they are looking pretty under-reported as of late…
4. Construction Costs Soar…from money news.com
It’s been a rocky start to the 2006 housing market, and while the latest PPI numbers might suggest a break in the clouds for construction costs, that isn’t necessarily the case.
“Construction materials costs are outpacing overall consumer and producer prices by a wide margin,” said Ken Simonson, chief economist for The Associated General Contractors of America (AGC). “(Tuesday) the government reported that the producer price index (PPI) plunged 1.4% in February but the PPI for construction materials and components rose 0.3%.”
The AGC has issued an updated analysis of construction materials costs in the latest version of its AGC Construction Inflation Alert, which shows that with a generally strong outlook for construction activity, materials prices are likely to rise faster than the overall rate of consumer or producer prices again in 2006. And that could make the price of building a home or a piece of commercial property significantly more expensive.
In the report, Simonson says, “the rate of increase for construction materials and components prices could be closer to the 10.1% rate of 2004 than the 6.1% rate of 2005. Once again, however, prices are likely to vary greatly by type of material and project.”
Rising construction costs mean one of two things: Homebuyers need to prepare to pay higher prices for new construction, or homebuilders - who can’t pass on higher prices to buyers because of slowing demand - will see a squeeze in profits.
Our advice: If you have any homebuilder stocks in your portfolio - Lennar, Toll Brothers, Centex - it’s probably time to sell.
materials prices are likely to rise faster than the overall rate of consumer or producer prices again in 2006
It’s almost axiomatic that EVERYTHING rises faster than the reported CPI rates, which have been deliberately understated by 3-4% on an annual basis for years. I could fill a screen on each trick: “hedonic adjustments”, “geometric weighting”, “core inflation”, and “substitution”.
When it translates into a hard number of tens of thousands in a multi-hundred-thousand dollar house, then maybe people will wake up and realize that something is systemically wrong with the big picture.
For the REAL inflation numbers go to http://www.shadowstat.com
“‘We endeavor to create value for our shareholders in a number of ways (including) an aggressive share repurchase program,’ said Karatz.
Purchasing overpriced stock does not create value. We all know the stock price will be lower in the future, but the brass at KB does not??
Purchasing overpriced stock creates value for the seller of that stock!
LOL. Ask Mr.Toll about that. Wonder if he’ll have to give it back some day ala Enron, Worldcom.
Well the numbers all look great on the surface except for a couple that stand out to me:
- “Cash and cash equivalents” way down, “Accounts Receivables” up (Herbert Kornfeld please pick up the white courtesy phone) as Ben mentioned
- “Inventories” way up (+$800M from last Q, +$2.3B from last year) — is this as obvious as it looks?: that KB homes are piling up like chocolates coming off that conveyor belt in that Lucy sketch?
- “Financial services” (partner deals with Countrywide?) are down 80%+ from last year. Not as many mortgages being written?
‘“Inventories” way up (+$800M from last Q, +$2.3B from last year) — is this as obvious as it looks?: that KB homes are piling up like chocolates coming off that conveyor belt in that Lucy sketch?’
Very astute of you to point this out, but remember, what is obvious to someone of your training might not be to those of us who do not possess it…
At any rate, my guess is that the pending inventory glut of homes currently under construction, and adding to an extant inventory flood, is receiving last year’s comp prices in valuations. Does that sound correct to the accountants in the room?
There’s a good question for the CC tomorrow. How is this inventory valued, as Cost Of Materials, as appraised at the time of completion, or marked-to-market monthly or quarterly as NAR figures provide relevant information.
The one you suggested is the scammiest in a declining market — value it at the original retail price regardless of any later lower valuation. The computer memory companies did that for years during the DRAM glut of the late 90’s.
I think it’s the company’s choice, as long as they are consistent quarter to quarter.
With that in mind, let’s look at that $800M figure. Just for laffs and easy math let’s say that their average house sells for $200K. That would mean an “inventory” increase of 4,000 homes this quarter. I can hardly imagine that they can build thousands of extra houses a month, every month, just throw them on a pile, so to speak, and continue as a company for very much longer.
As noted above, housing inventories are valued at the lower of cost or market. All the publicly traded builders have them on the books at cost right now. Prices will have to drop about 25% (based on YE 2005 gross margins) before impairments start kicking in. If that happens, inventories will be marked to market.
Watch the specs (completed but unsold houses) and backlog (contracted but not built houses) numbers of the builders. As the specs increase and the backlog decreases, we’ll start seeing some aggressive price reductions. Of course that will cause more cancellations, leading to more specs and lower backlog. I believe “death spiral” is the correct phrase.
This brings to mind the builder incentives. I assume that if a builder offers a car with that McMansion, the value of the car does not get subtracted from the contribution of similar homes to the inventory line on the balance sheet?
that KB homes are piling up like chocolates coming off that conveyor belt in that Lucy sketch?
—————
That is priceless !!
a report on realty times for newbury park–ventura county
Ultimately, unless we see a major changes in the economy and/or interest rates, don’t expect major changes in house prices for the next few years. We will need the average incomes catch up with the average sale prices - this will take awhile!
Conejo Valley Stats as of 1/21/06 vs. 10/17/05 vs. 8/10/05, (now/then):
Active listings: 694/770/644
In escrow:273/485/356
In escrow stats:
Median price: $745,000/$699,000/$739,000
Average price: $909,490/$933,950/$959,402
Ave days on market: 65/50/40
For Single Family Residences only:
Active listings: 694/613/525
In escrow: 189/247/358
In escrow stats:
Median price: $849,000/$799,900/$845,000
Average price: $1,079,918/$1,130,084/$1,134,030
Ave days on market: 69/58/44
Get that Avg DoM number up around 200 - GOING UP STEADILY - and you’ll see some serious price reductions. Add in a boatload of defaults on top of that and look out below!
Don’t kid yourself.
At what point does pension soon to be hedge fund money become fuel for the MBS?
((www.bergen.com/page.php?qstr=eXJpcnk3ZjczN2Y3dnFlZUVFeXk0MDAmZmdiZWw3Zjd2cWVlRUV5eTY5MDE2ODImeXJpcnk3ZjcxN2Y3dnFlZUVFeXkxNA==))
Wednesday, March 22, 2006 By MARIE COCCO
What could be worse than a pension crisis that already has left millions of Americans without the retirement benefits they’ve earned? The congressional effort to fix it………..In an unusually rapid response to the demise of traditional defined-benefit pensions — and the corporate dumping of pension obligations into the lap of the government insurance program that’s supposed to act as an emergency safety net — lawmakers are in the final weeks of deciding no less than this: Who will have a pension? And how much power will Wall Street have to decide this?……………….The bond market would, in effect, decide who gets a pension, and at what amount. “The more trouble you are in, the more we’re going to turn the screws on you,” is how one congressional aide described the idea……………If this all sounds like a lose-lose proposition for millions of workers, that’s because it is. The big winners could easily turn out to be the lobbyists who’ve managed to get congressional conferees to consider one self-interested idea after another………..Such as this one: How about letting Wall Street’s hedge funds manage some pensions — and do so without any of the current federal rules that require managers to act only in the financial interest of beneficiaries?
Worth a repost for those who have not already seen it
http://www.itulip.com/housingnotlikeequities.htm
That’s a good article that characterizes the beginning of a bubble collapse.
Housing however, doesn’t go to ZERO like stocks can. To get sales moving prices drop, sellers provide financing in some situations, lenders clear foreclosed homes… and then a new maket emerges that simply has different dynamics… AND A LOT LOWER PRICES.
Somehow Japan has cultural differences that have prevented the market from returning to a healthy state for a lot longer than one would expect to have happen here. And they apparently don’t have a liquidity crisis and haven’t had one in a long time. Time for the Californians to go to Japan and statrt flipping there?
We had them cultural differences too, back in the 1930s…
txchick57,
Do you have a link to “Scott Reamer, a hedge fund guy in Denver” ?
It’s on Minyanville, a trading pay site that gives you realtime commentary thoughout the day. Great service for stock and futures traders.
txchick, thanks for the hedge funds comment. I’ve been loading up on BRK the last 4 years, looking more and more like a real safe haven.
A very interesting observation about sales over in the Yahoo KBH board: Q1 sales for the past two years have been significantly higher than the previous Q4’s sales, not 12% lower. Well well well.
We might see The Letter Opener of Death bright and early tomorrow morning.