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3 Homebuilders Building on Solid Foundations

Despite analyst concerns, these homebuilders should do well in 2014

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Homebuilders to Buy: KB Home (KBH)

homebuilders-homebuilder-stocksKB Home (KBH) delivered its first Q1 profit since 2007 last week on the back of strong price increases across all four of its regions. Chief among the increases was its West Coast region which saw the average sale price increase 30% year-over-year to $525,000. The bad news is that only 346 homes were delivered on the West Coast in Q1 compared to 509 a year earlier.

That decline would be killer if you didn’t look more closely at its backlog. The West Coast’s average selling price on the 580 homes still to be built is $567,000 — $159,000 higher than the backlog from a year ago. The West Coast is generating more revenue from less homes. That’s a problem homebuilders can live with. KBH stock will benefit down the line should the company move all of its backlog through the pipeline.

In 2013, KB Home delivered its first annual profit since 2006. Back then, its book value was $3 billion, more than double today’s market cap and six times its current book value. Those were clearly better days. However, its Q1 2014 adjusted housing gross margin of 17.8% — 260 basis points higher than Q1 2013 — is a sure sign its business is improving on the West Coast where it generates more than 40% of its overall revenue.

As California goes, so goes KBH stock. Should KBH’s adjusted housing gross margin hit 20% in 2014 along with a 12% selling, general and administrative margin, KBH’s bottom line profit should be greater than $100 million come the end of November.

If so, you could value KBH stock at $2 billion or more. With KBH stock down 19% over the past 52 weeks, I like its chances of reversing that trend.

Article printed from InvestorPlace Media,

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