KB Homes ‘Spills The Beans’ On ‘Pathetic’ Season
Some homebuilder news. “KB Home, one of the largest homebuilders in the United States, today reported financial results for its second quarter ended May 31, 2006.”
“‘We are now operating in a more difficult market environment,’ KB CEO Bruce Karatz said. ‘The country’s current-year home sales will likely fall well short of the record rates we have seen in the recent past as the market works through inventory build-ups, including a spike in investor/speculator resale inventory, higher interest rates and higher cancellation rates.’”
“New orders during the quarter fell 19 percent to 9,908 chiefly from more prospective buyers canceling their orders. ‘The impact of higher cancellation rates is evident in the substantial year-over-year decline in our net orders in the second quarter. These conditions will likely persist at least through the remainder of 2006,’ Karatz said.”
“‘KB Home generated solid second-quarter financial results in a progressively more challenging housing market that is struggling to find equilibrium,’ said Karatz. ‘In many regions across the country, market performance has receded from the all-time highs established in recent years, largely due to a sharp reduction of speculative purchases and an over supply in new and resale inventory.’”
“‘Given the decline in new home demand and increase in new and existing home supply, we believe it is prudent to revise our 2006 earnings forecast downward,’ Karatz said.”
“The Company repurchased two million shares of its common stock during the three months ended May 31, 2006. Over the six-month period ended May 31, 2006, the Company repurchased four million shares. The Company currently is authorized by its board of directors to repurchase up to an additional six million shares and plans to continue repurchasing its shares through the remainder of the year.”
From MarketWatch. “Morgan Stanley on Thursday lowered its industry view on home-building stocks to cautious from attractive, citing order declines and rising inventories. ‘A cooling housing market coupled with higher mortgage rates (especially on the shorter-term ARM products) prompted significant levels of inventory to enter the market, which in turn, overwhelmed demand,’ Morgan Stanley said.”
“In spite of solid employment data, higher inventories created a ‘domino effect’ as potential buyers are sitting on the sidelines to see how the market shakes out, the analysts added.”
“Analysts at Susquehanna Financial Group and JMP Securities also Thursday lowered their estimates on the builder group. ‘Late May and early June became the season of confession for builders, as one after another lined up to spill the beans on a very pathetic selling season,’ Susquehanna said.”
“JMP knocked down its estimates on several builders, saying it sees 2007 earnings falling between 20% and 40%. ‘Although we had anticipated sales would decrease at a faster rate than the market’s expectations, we too were surprised by the magnitude of the drops and in particular by how quickly margins have deteriorated,” the broker said.”
From TheStreet.com. “The Washington D.C. housing market continues to see far fewer home orders because of the rising inventory levels in the region, which is hurting homebuilders. Contracts in the greater metro region fell 40% in May, and closings declined 32%, according to a research note from Raymond James analyst Rick Murray.”
“‘Conditions appear to be deteriorating in the D.C. market and we suspect stabilization will not come for some time as immense speculation over the past few years will weigh on the market for some time,’ Murray wrote.”
‘Over the six-month period ended May 31, 2006, the Company repurchased four million shares. The Company currently is authorized by its board of directors to repurchase up to an additional six million shares and plans to continue repurchasing its shares through the remainder of the year.’
Looking at the KB balance sheets for the previous quarters, it is obvious they will have to borrow the money to buy shares.
Alot of posters have wondered why the HB stocks have been holding their share prices so steady with all the bad news coming out…
Are we now beginning to see the man behind the curtain?
KB Boardroom dictation….
I got it Bruce!!!! I saw this movie once where a guy was stranded and hungry, so he decided to cut off his leg and eat it.
Great work JR… we will call it…. “fiscal recycling”…
Ludwig von Mises: `Although it sometimes might be neccessary to burn your furniture, you should not start to think you discovered a new sustainable energy source’
Isn’t this a bit like a FB who uses his home equity line of credit to pay off his mortgage?
And thinks he’s building more equity by doing it.
Fantastic web site with awesome historical data:
http://www.economagic.com/cenc25.htm
For example pull up a chart of U.S. number of houses for sale for the last 30 years. Then click GIF chart and watch the housing bubble appear before your very eyes (change the year to make sure you include the 1980s housing bubble for a good comparison.
This is an awesome site with lots of historical data.
Here is a link to a chart with historical data from 1973 to 2006 of West Houses for sale. The pink vertical bars are recessions.
http://www.economagic.com/em-cgi/charter.exe/cenc25/fsalmon05+1973+2006+0+1+0+290+545++0
Its beginning to look a lot like 1978 again, complete with an inventory crash in the housing market and stagflation in the macroeconomy. The big question is whether Bernanke will behave more like Miller (Fed chairman in 1978) or his successor Volcker (appointed in 1979 after Miller’s short period in office)?
I think Bernanke wants to do what Volcker did, but this time *it’s different*. Bernanke can’t even raise another 100 bps let alone 1000 bps which is what he’d have to do to get to Volcer’s rate.
Nice chart. We are past the inventory for the late 80s early 90s, and climbing towards the inventory for the late 70s early 80s. I remember what happened with property values in OC in the late 80s and forward, but I don’t know what happened to values in the early 80s. I remember the stagflation and extremely high interest rates, but I was a bit young then, so I don’t really know what happened to property values. Can anyone with a little more experience enlighten me?
One caveat - I think to best interpret the chart, one should consider the aggregate numbers with respect to the population at that time. The population has basically doubled (?) since the 70s, so perhaps to reach a level equivalent to the 70s we’d need to see double the aggregate inventory. I have no doubt we will reach that level and then some. This downturn is going to be brutal.
Cool! One of the clearest views of the bubble can be seen in the “US Months Supply of Houses For Sale at Current Sales Rate; NSA” chart (NSA = not seasonally adjusted). The peak level of this chart NEVER stayed below six months for an entire year between 1963-1997; thereafter, there is an eight-year period when the months supply never ONCE made it up to six months! As we have recently discussed, the recent inventory correction is driving this months supply back to normal levels with a vengeance.
One interesting footnote: 4 out of 6 recessions which occurred between 1963 to the present were accompanied by housing inventory corrections, with ten months or more supply on the market. Further, the maximum months supply occured in the 1974-1975 recession, at about 14 months.
Great stuff… this is in “worth E-mailing to friends I talk about the bubble to” category. One question: why didn’t inventory increase from 1989-93 while the last bubble collapsed? It was absolutely a national bubble back then; we felt it in North Carolina.
It is true that many parts of the country experienced the early-1990s real estate slowdown; I was living in the midwest, and realized the benefit of shopping for real estate when nobody else thought that was a good idea (which means there is a great selection of homes at to choose from at affordable prices). However, it is possible that inventory increases in some regions were offset by other reasons which did not see them; this is not happening in the current correction.
“other regions” not “reasons” (hit the “send” button before editing)
“‘We are now operating in a more difficult market environment,’ KB CEO Bruce Karatz said.
So sorry to hear that… Bruce!
I have nothing against the home builders… so the fact they’re hurting is not something I have no pity towards.
The fact that the flippers will see 100X the pain… ohh… Pardon me for smiling at that thought!
:) 
The “alligators” are going to eat them alive!!!
Neil
I have nothing against the home builders
Unless it is KB, which is hardly a home-builder, and more like a crappy-cheaply-made-overpriced-POS-builder, in which case it is OK not to have pity.
You should have some animus towards the big homebuilders - they all have self owned mortgage branches that they used to push high-rate, no/low documentation, loans to sheeple who otherwise wouldn’t have gotten a mortgage or been able to afford a home. They offered me all kinds of deals to sign their paper (favorite is the big discount off their very high closing costs to lock you into a higher rate loan than you’d get from a bank so they could make their “discount” back fifty fold over the term of the loan)
YES and he is buying Stock …It must be a good buy with business collapsing around him!
But lets do anything to “try” to keep the prcie above his option grants!
Hope stockholders SUE the living pants off these guys for PLUNDERING the corporate ASSETS!!!
why would the shareholders sue? The company is buying back their stock.
Buying back with borrowed money. The way it works is this - the upper management issues itself at no cost more shares, diluting the existing shareholder’s stake. In order to support the price, they borrow, and buy back the stock, while at the same time they sell theirs. Look at insiders’ profiles - you’ll notice “non-market acquisition at $0 of X shares”. Public corporate corruption is a total joke.
BTW, if you buy shares on the market, chances are they came from an insider, you’ve diluted yourself right when you bought.
“The Company repurchased two million shares of its common stock during the three months ended May 31, 2006. Over the six-month period ended May 31, 2006, the Company repurchased four million shares. The Company currently is authorized by its board of directors to repurchase up to an additional six million shares and plans to continue repurchasing its shares through the remainder of the year.”
Ok, Lets purchase 2M shares that we know we can get for half price at the end of the year…If I was a stock holder, I would be miffed…
The company CEO, officers & board members could care less what retail shareholders think. They have to keep using company money for buy-backs, in order to support the share price long enough so insiders have time to bail out –and to do so gradually– without incurring the attention & wrath of the SEC.
“In spite of solid employment data, higher inventories created a ‘domino effect’ as potential buyers are sitting on the sidelines to see how the market shakes out, the analysts added.”
I suspect the real story here is that perspective buyers have to sell their existing home before they can buy a new home.
Absolutely true - i was going to buy - had to wait 6 months to get a sale on my place (I realized the inventory build in my neighborhood on my own just by looking at craiglist ad the local papers - and took the first offer I got). In the meantime, I then went looking on the web to verify inventory build, found this website and was saved from buying too early (thanks to Ben and everyone here!). I will park my cash until I find the right deal.
KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands)
May 31, November 30, May 31,
2006 2005 2005
———– ———— ———–
Assets
Construction:
Cash and cash equivalents $9,680 $144,783 $76,279
Receivables 573,219 580,931 461,174
Inventories 7,568,977 6,128,342 5,094,819
Am I the only one see bright RED FLAGS with the inventory number? Are they booking revenue on the inventory before the actual sale occurs?
They are rapidly running out of cash !
Burn rate is going to bite the flippers and the builders, and I have a hard time thinking of any two groups who more deserve getting bitten.
The flippers who haven’t already bailed out are toast. What happens to the builders OTH, depends on a number of factors, the most important one being:
When (and for what price) did they purchase the bulk of their existing land inventory?
If they purchased most of it pre-bubble (or early bubble), then they can easily slash prices by BIG margins (30-50%) and still turn a tidy profit on each unit sold. Construction labor and raw materials costs have gone up significantly, but –for the most part– not by 200-300%, the way land has in the past 5 years. Plus, they’ll probably have the added benefit of seeing labor & raw materials costs go down, as the housing ATM “goldilocks” economy shuts down for years to come. They will be able to cherry-pick from a large pool of skilled unemployed craftsmen from 2007-2012 or so.
Builders should have PLENTY of ways to keep construction costs down and profits coming in –assuming they didn’t buy the bulk of their land in the past 2-3 years that is.
It sounds to me like inventory and cash flow will kill them, not to mention a severe shortage of buyers, after everyone (including newly prudent lenders) grasps what Ben Bernanke really meant by “price deceleration” (the kind that eventually leads to negative appreciation).
They spent $287 million buying back 4 million shares the last six months at a price of about $71.75. Now the stock is $27 lower so about $108 million of their “investment” has gone poof, likely forever.
Also they’re inventory is up, debt up, debt service up, sales down and guidance down $1.
They have nearly $6 Billion in debt and…. drum roll…
a mere $9.6 MILLION in cash.
Someone please explain to me how this is going to seriously work out. If these guys were running my business, I think I’d shoot them.
ah, who’s money are we talking about? the insiders cashing out have their money, it’s the shareholders who lost the money. I can’t imagine that the only thing to do with $287,000,000 is to buy back stock. how can they only have $9 million?
Yeah, I just don’t understand these HBs. They know the bubble is over and sales and revenues are going to decline. So, they are going to need their cash to ride out the downturn. They’ve been through this before. Why would they waste their cash re-purchasing shares? It hurts the company, by making it vulnerable to cash shortages. So, I don’t see how it helps anything, except for maybe a few executives who are looking to sell some shares or exercise some options. But, it would seem like that is a breach of fiduciary duty to vote to re-purchase shares just to help out the stock price so that the executives could cash in.
Also, is it just me, or is Morgan Stanley just a bit late in downgrading the HBs? Most are trading at 52-week lows. Seems like they are a tad late in telling their investors to get out.
“Why would they waste their cash re-purchasing shares?”
I would guess this is part of their much-vaunted new business model.
“Why would they waste their cash re-purchasing shares? It hurts the company, by making it vulnerable to cash shortages. So, I don’t see how it helps anything, except for maybe a few executives who are looking to sell some shares or exercise some options.”
BINGO!
” But, it would seem like that is a breach of fiduciary duty to vote to re-purchase shares just to help out the stock price so that the executives could cash in.”
BINGO!
Welcome to the new economic model, the corruption economy.
Set up a corporation. Have the corporation borrow money. Pay that money to yourself through outrageous salaries and stock options. Walk away allowing the corporation to go bankrupt. Rinse. Repeat.
Watch The Corporation (part 2?) on Google Video. Thanks Google!
Enron again… Good luck to the HB CEOs in getting off more lightly than Lay and Skilling.
the best thing is that all the analyst on the conference call urged them to buy stocks hand over fist because of the valuation.
just stupid!
Usually when I see inventory numbers rise for manufacturers, I think that someone is playing a lot of games with the numbers. But I’m don’t follow HB enough to understand how they do accounting. Can someone enlighten me? That $9million in cash left would have me nervous if I owned stock in KB.
Somewhat off-topic, but this crossed my path recently and I just had to share. (Funny, I don’t see the topic of buying back the construction company’s own shares listed anywhere in the Agenda….)
“What To Do When Construction Projects Go Bad (In Washington State)”
A one-day seminar
Seattle, WA — August 29, 2006
http://www.lorman.com/seminars/seminar_details.php?pid=157450
This seminar will explore the various problems that can befall a construction project and the steps that can be taken by contractors, owners, and sureties to minimize them. The seminar will address how to draft contracts and take steps to reduce the possibility of those problems occurring, and also how to best handle the problems after they arise. The seminar will identify documents and circumstances which frequently lead to construction projects going bad and what can be done to keep the project moving and to minimize claims and losses. Finally, the seminar will discuss types of alternative dispute resolution which might be of help to the parties in resolving any claims.
Seminar highlights:
* Problem/solution analysis
* Contract and change order considerations
* Risk management
* Cost recovery
* Insurance coverage for losses
Learning objectives:
* The attendee will be able to discuss scheduling and buyout.
* The attendee will be able to identify the nature and types of indemnity.
* The attendee will be able to review the change order process.
This one-day seminar is designed for attorneys, construction and project managers, presidents, vice presidents, engineers, architects, contractors, subcontractors, contract managers, principals, operations managers, estimators, insurance professionals, and real estate professionals.
SELECTED HIGHLIGHTS FROM THE AGENDA
A. How Do Construction Projects Go Bad?
1. Contract Forms and Absence of Contracts — It All Starts Here
2. Designer Involvement
3. Project Documentation
4. Defective Workmanship
5. Extra Work and Impact Claims
B. Perspectives of the Project Participants
C. Now That There Is a Problem
1. Lien Process
2. Notice and Initiation of Claims
3. Keeping The Job Progressing
II. Construction Defects
A. Condominium Act New Developments
B. Permit Process for Remediation
C. Third-Party Inspection
D. New Types of Defect Claims
III. Problem Identification and Resolution
A. The Estimate’s Role
B. Scheduling and Buyout
C. Project Impacts
D. Cost Recovery
IV. Indemnity
A. Nature and Types of Indemnity
B. Contract Indemnity Scope and Legal Limitations
C. Risk Transfer Provisions
D. Defense Fees and Costs Recovery
E. Contractual Indemnity Exemplars
F. Builder’s Statute of Repose Issues
V. Insurance Issues
A. Scope of Commercial General Liability Policies on Construction Projects
B. Burdens of Proving/Disproving Coverage
C. Business Risk Exclusions Certificates of Insurance and Legal Effect
D. Additional Insured Coverages
E. Broker/Agent Considerations
F. Failure to Provide Insurance Coverage Pursuant to Contract
G. Reservation of Rights Defenses
H. Key Insurance Coverage Cases — Construction and Product Defects
SO now they admit it was “speculative” demand and NOT REAL BUYERS. ONLY SPECULATORS! SO THIS CLOWN THINKS THINGS WILL IMPROVE LATER - ie SPECULATORS WILL RETURN TO THE MARKET???
remember these gems from mr. toll?
“New York and Washington and Phoenix and San Fran and L.A. and Las Vegas and Naples and Boca” - were about to slow down painfully. “Investors will get creamed, and they’ll get out of the deals,” he said, noting that a subsequent recovery would take anywhere from 3 to 10 months. But beyond that - a catastrophic crash? “Why can’t real estate just have a boom like every other industry?” Toll asked in complaint. “Why do we have to have a bubble and then a pop?”
…
The company expects to grow by 20 percent for the next two years and then will strive for 15 percent annually after that. Those estimates suggest that the company’s expected production of around 8,600 houses this year will expand to at least 15,000 houses by 2010. Individual Toll developments now range in size from a few dozen to 3,000 houses.
…
In the past couple of years, Toll and his deputies have begun analyzing European housing data to see if they hold any lessons for a maturing American housing market. Toll has been talking up the research to stock analysts and the financial press for the past year. His conclusions carry a whiff of new-paradigm thinking, but he nevertheless seems convinced that Europe’s present-day reality is America’s destiny. I asked Toll what our children - my kids are both under 8, I told him - would be paying when they’re ready to buy. “They’re going to live with us until they’re 40,” Toll said matter-of-factly. “And when they have their second kid, then we’ll finally kick them out and make them pay for the house that we paid for. And that house will cost them 45 to 50 percent of their income.”
I grew alarmed. Was he kidding? He assured me he was not. “It’s all just logic,” Toll said. “In Britain you pay seven times your annual income for a home; in the U.S. you pay three and a half.” The British get 330 square feet, per person, in their homes; in the U.S., we get 750 square feet. Not only does Toll say he believes the next generation of buyers will be paying twice as much of their annual incomes; in terms of space, he also seems to think they’re going to get only half as much. “And that average, million-dollar insane home in the burbs? It’s going to be $4 million.”
“I grew alarmed. Was he kidding? He assured me he was not. “It’s all just logic,” Toll said. “In Britain you pay seven times your annual income for a home; in the U.S. you pay three and a half.”
He’s full of it. Britain (and the rest of Europe) has a much higher population density than the US, but they are headed for a worse crash then we are. Likely a Japan-style crash, as just about every European country faces declining populations.
“These conditions will likely persist at least through the remainder of 2006,’ Karatz said.”
You got that right buddy…especially the “at least” part.
Read about A STOCK MARKET CRASH IN 2006?.
“Watch out below! We could well be headed for a Ben Bernanke crash…
This coming crash could hit all sorts of financial assets - stocks, gold, commodities and real estate. In fact, it’s already happening… And my recommendation last month to move to “cash” (earning 5%) and prime rate funds (8%) has proven good advice.”
“Watch out below! We could well be headed for a Ben Bernanke crash…”
Could be??! I guess you aren’t talking about submerging markets…
You know what they say…. when you get a new man in office, trouble happens within six months.
Why the rally today? Because he spoke?
It seems as though the PPT works overtime on BB speech days, and during FOMC meeting week. JMHO.
Strong Balance Sheet KB-
Cash down 88%
Inventory up 50%
Liabilites up 51%
Way to run the company into the ground. Purchase land (inventory) you will soon write down in value, buy back shares with debt/cash and then excercise options and immediately sell them.
You know what they do to raise cash, right ? They liquidate inventory. Anyone want to buy a house ?
They are emailing me every week with open house specials on inventory homes -come one, come all - Because I got on their list a year ago while looking in Tampa…
They must be doing something right — otherwise, why would investers have driven their stock price up today by 4.4%, despite downgrades from Morgan Stanley and JMP Securities?
http://tinyurl.com/mn5kr
Everything went up today, rightly or wrongly.
Gosh, Stucco. Didn’t you notice the presence of the angel tending to her homebuilders? Look at how well the angel kept the stocks up today. Hardly a ripple. And that on a day when brokers were drastically lowering their target prices for them. Look at these charts for the homebuilders….
http://tinyurl.com/ovpm8
Maybe the sell-off is overdone?….why is it that every time the HB stocks don’t behave the way you like it’s some sort of conspiracy? Notice that Legg Mason’s Bill Miller, who has a stellar long term track record and manages a massive amount of assets has been buying builder stocks over the past week. Experienced investors are beginning to see value in these names even if the doom-and-gloomers here don’t. That’s not a conspiracy; it’s a difference of opinion about a controversial investment.
he ist long the hb at leat for 4-5 month.
under water!
Business Week says:
“High Frequency Economics in Valhalla, N.Y., is predicting a recession starting in the first quarter of 2007, largely because of a slump in housing sales. “We see people just walking away from the market,” says Carl B. Weisberg, chief economist at HFE. “This is enough to drag our economy down to a full halt by the end of the year.”
http://www.businessweek.com/bwdaily/dnflash/jun2006/nf20060615_5460_db016.htm
“Full halt” sounds more dire than a recession, which is a mere slowdown in the level of output (GDP)…
Check out the statistics of the worst tranches of a CMBS:
http://www.securitization.net/pdf/Nomura/ABXIndex_6Jun06.pdf
FICO scores of 610 ??? Does someone with that score ever pay a bill for anything??
KBH stock kicking butt this AM on the “fabulous” earnings report. Go figure………….
Yeah KBH surprised me yesterday and even today. It took back all my short profits from the past 2 weeks. This is surely a dead cat bounce. Fundamentals don’t support the latest direction of this stock.