KB Home profit drops sharply
KB Home, one of the nation’s largest home builders, said Thursday that first-quarter profit plunged as the company felt pressure from a slowing housing market and rising defaults of sub-prime mortgages.
Westwood-based KB said it expected the sector’s problems, most notably a glut of homes on the market and intense price competition, to continue at least through 2007, resulting in lower sales and profit for the year.
Still, management sounded upbeat, saying steps it had taken to reduce inventory and exposure to sub-prime loans would help it weather the housing downturn.
For the quarter that ended Feb. 28, the company reported net income of $27.5 million, or 34 cents a share, down from $173.3 million, or $2.01 a share, a year earlier.
Even with the sharp decline, the results still topped Wall Street’s expectations. Analysts surveyed by Thomson Financial were looking for profit of 25 cents a share.
Revenue fell 19% to $1.77 billion from $2.19 billion, as unit deliveries declined 16% and the average home selling price dropped 5%. Still, revenue surpassed analysts’ forecast of $1.61 billion. The company delivered 6,655 homes at an average price of $261,400.
KB Home shares dropped 54 cents to $47.25.
The company said it was controlling risk by waiting to start construction on the vast majority of its homes until buyers had qualified for mortgages.
The company also was increasing its custom home program, which allows qualified buyers to participate in the design process before construction begins.
“We continue to maintain that our choice value approach and build-to-order business discipline is far better than building spec homes and then forcing a value on the customer through discounts and incentives in order to sell those homes,” KB Home Chief Executive Jeffrey Mezger said during a conference call with analysts.
The uncertainty in the housing market poses significant challenges in the year ahead, Mezger said.
The primary risk from the shakeout in sub-prime lending is a potential slowdown in housing demand from buyers not being able to qualify under stricter underwriting standards or the possibility of an increased supply of unsold homes from a rise in foreclosures, Mezger told analysts.
Orders were off 12% to 7,677 in the most recent quarter. The cancellation rate was 31%, a sharp improvement from the 48% in the fourth quarter of the company’s fiscal 2006.
The housing sector has been plagued by excess supply accumulated during the five-year boom that ended 18 months ago. That oversupply has forced builders to cut production and lower prices.
“We believe these conditions will likely continue for at least the remainder of 2007, reducing our quarterly and full-year revenues and earnings compared to 2006 results,” Mezger said in a statement.
