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KB Home Reports Plunge in Orders, Slashes Forecast

Times Staff Writer

The nation’s cooling housing market is starting to give KB Home a bit of a chill.

The Westwood-based builder reported Thursday a 19% drop in new-home orders in the second quarter, traditionally the strongest home-selling season of the year.

KB, the nation’s fifth-largest home builder by sales volume, also slashed its profit outlook for the rest of the year, citing rising cancellations, fewer speculative buyers and growing inventories of unsold new and existing homes.

What’s more, KB said earnings for the period ended May 31, while up 14% year over year, rose at the slowest pace since the end of 2004.

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“After experiencing several years of accelerating demand for new homes, we are now operating in a more difficult market environment,” KB Chief Executive Bruce Karatz said in a statement.

Wall Street analysts have cut profit estimates for all of the top 10 builders in recent weeks as companies have reported a drop in orders, which they blame on higher mortgage rates and rising home prices.

KB reported that its net income rose to $206.6 million, or $2.46 a share, from $181.5 million, or $2.06, a year earlier. The per-share results slightly beat analysts’ estimates of $2.39, according to Thomson Financial. Earnings per share results also got a boost from the company’s repurchase of 2 million shares in the second quarter.

Revenue rose 22% to $2.59 billion, thanks to higher average home prices and more units delivered compared to a year earlier.

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“This quarter was better than I would have thought all the way around,” said Stephen East, an analyst with Susquehanna Financial Group, who has a positive rating on KB’s stock. “The only thing worst than expected were the orders.”

The higher quarterly results couldn’t negate the mounting evidence of weakening customer demand for its houses.

KB said that new-home orders fell to 9,908 in the quarter from 12,290 a year earlier. The biggest plunge was in its Southwest market, consisting of Arizona, Nevada and New Mexico, where orders plummeted 50%. On the West Coast, which includes California, orders declined 20%, while in the Southeast, orders were off 24%.

The only region where KB’s orders rose was in France, where they were up 16%. KB is one of the largest builders in France.

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The slackened demand in the U.S. prompted KB to revise its full-year earnings guidance. “These conditions will likely persist at least though the remainder of 2006,” Karatz said.

KB is projecting a profit of $10 a share, or a 5% increase over 2005 results. The company’s previous forecast called for earnings of $11.25.

KB was the latest builder to trim expectations. Pulte Homes Inc., the No. 2 U.S. home builder, cut its fiscal 2006 forecast June 2, and Toll Bros. Inc., the largest U.S. luxury home builder, trimmed its outlook May 23.

Analyst East has estimated it could take as long as 18 months to right the supply-and-demand balance.

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KB’s results were released after the close of regular trading. Shares of KB Home rose $1.91, or 4.4%, to $45.10, but fell 10 cents after hours. Shares of the company, which sells homes in 15 U.S. states and France, have declined 38% this year, compared with a drop of 29% by the Standard & Poor’s supercomposite home building index of 16 companies.

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Bloomberg News was used in compiling this report.


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