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One of the leading homebuilding companies in the U.S., KB Home (KBH - Analyst Report) recently acquired the 330-acre Mason Ranch. The land is located in one of the most sought-after Cedar Park/Leander West neighborhoods in metropolitan Austin. The company intends to build a residential community complex on the property that should be ready by the latter half of 2013.
Mason Ranch will be a family friendly community with 1,019 home sites. Public schools and other retail facilities are located in the vicinity of the proposed development site. The community will have access to US-183 and US-183A tollways.
The new community will have all the signature features of KB homes. Each of the homes will be Built to Order and will cater to individual demands and preferences of customers. Customers will have the liberty to choose the home sites, floor plans and other finishing details of the home like flooring, cabinets and other essentials from the KB Home Studio, the company’s retail-like design center.
Like other KB Home projects, the Mason Ranch home sites will incorporate energy-efficient features, thus lowering utility bills considerably. This is likely to elicit a favorable response from customers.
Through its operational business model KBnxt, KB Home always begins construction only after a purchase agreement is executed. This process helps the company turn over its inventory more quickly than its peers, thereby supplying capital for reinvestment. In the long run, this reduces the risk of unsold inventory, leading to higher returns on invested capital.
The company has been intending to make a strategic shift in its geographic footprint. The focus is to place the communities in highly desirable land-constrained submarkets that enable it to sell larger, higher-priced homes, thus driving a strong increase in average selling price.
The Mason Ranch project is in line with the company’s strategy to open about 25 new communities during the third and fourth quarter of 2012. Furthermore, the company plans to invest about $350 million in the second half of fiscal 2012, to acquire and develop land to ensure profitability in 2013. KB Home expects fourth quarter revenue to increase 35% sequentially, owing to higher average selling price and better backlog conversion rate.
We currently have a Neutral recommendation on KB Home. The stock carries a Zacks #3 Rank (a short-term Hold rating).
We believe that the housing market is slowly stabilizing with an increase in employment rates and higher consumer confidence. We appreciate the company’s strategic initiatives like land investments in higher priced and better located communities. However, we are aware that the market is still experiencing uneven recovery and the company may have to wait for some time before it achieves profitability.