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KBH's Growth Initiatives Update

TOL KBH

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During its second quarter 2012 conference call, one of the leading homebuilding companies in the U.S., KB Home (KBH - Analyst Report) declared that it is “going on offense” in order to drive top-line growth, given the growing housing market recovery. The company declared that it will be taking four initiatives as its “going on offense” strategy.

The first strategy involved an investment of $350 million in land and land development during the second half of fiscal 2012. The company sought to place the communities in highly desirable land-constrained submarkets as it would enable it to sell larger, higher-priced homes, thus driving a strong increase in average selling price. The other strategies included activating communities, which were held for future development, increasing revenues per community, and strengthening management teams with additional resources. During the past six months, the company has taken several steps in line with these strategies.

Recently, the company acquired land and lots in two communities in northeast San Antonio.  About 700 new homes are to be built in the communities of Legend Point and Landmark Pointe. Construction is expected to start from mid 2013.

KB Home has also acquired 65 lots in Fuquay-Varina, southwest of Raleigh, North Carolina to build a new community called Lakestone Village early next year. Lakestone Village will be an addition to the company’s existing communities in Raleigh-Durham area.

The company has also acquired 45 finished lots and 160 undeveloped lands in Copperfield community in Converse. Converse is one of the fastest growing communities in Northeast Bexar County.

KB Home acquired lands for 100 luxury homes in the sought after community of Playa Vista in Westside, Los Angeles. The construction of homes will start in spring. Even as the rest of the housing market is recovering, the demand for luxury homes has been particularly strong. As such, Toll Brothers, Inc., (TOL - Analyst Report), another leading luxury homebuilder in the US, has been witnessing strong overall growth over the past few quarters. The acquisition of Playa Vista will enable KB Home get a share of the benefits of the luxury housing market.

KB Home intends to open more than 120 communities in 2013, with more communities slated for the later half of the year. As such, community count is expected to increase by at least 15% to 20% by the end of next year. The company expects profitability for fiscal 2013.

We are positive about KB Home’s aggressive investment in land assets and communities. The rising demand for new homes has led to a favorable situation in the housing market, where inventory levels are dropping and prices are moving up. This has necessitated the building of adequate number of new homes to maintain the required level of inventory to meet growing demand. Acquiring lots and lands will help the company to capitalize on the increasing housing demand. However, we believe that it may take time to achieve sustainable profitability as the housing market recovery process is erratic and uneven.

We currently have a Neutral recommendation on KB Home. The stock carries a Zacks #3 Rank (a short-term Hold rating).

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