Several years ago, KB Home (NYSE: KBH) laid out a multiyear plan to improve both returns and growth after getting devastated by the housing crisis. The plan was to complete a massive balance sheet deleveraging and improve its return on equity to 10%-15% by 2019. Based on the company's most recent financials, it has already met some of those goals.
For close to a decade, housing starts have been on the rise -- albeit from a very, very low base back in 2008 -- and investors are likely wondering how much longer this run can continue, and how KB Home will be able to maintain these rates of return. Based on management's statements on its most recent conference call, it should be a while. Here's a look at some of the most revealing quotes from KB Home's management that should help investors get a better grasp of the company and the housing market in general.
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Getting more out of each sale
Getting higher prices per house sold and higher sales growth is music to a homebuilder's ears. According to CEO Jeff Mezger, the company has been able to hold the line on sales price without sacrificing too much order growth:
In a business with historically low margins and the looming threat of higher labor costs, the ability to hold the line on pricing and still get higher order growth is encouraging for the coming year.
A more tailored approach
A large part of the reason that KB Home and others have been able to increase sales prices is that the housing market is tightening, but management is also finding other ways to boost selling prices and margins. According to Mezger, the company is seeing a lot of success with its built-to-order homes:
There are two types of homes that KB Home and others build: built to order and spec homes. Spec homes are the ones where the buyer takes the house as built, whereas built to order allows customers to select from a suite of optional packages to be built into the home -- like adding granite countertops or a bathroom upgrade. These built-to-order homes are much more attractive sales for homebuilders because they come with higher selling prices at marginal cost. Also, customers that elect built-to-order homes are much less likely to back out of a purchase. From an investor's standpoint, seeing high rates of built-to-order homes is one of those things to keep track of because it shows the strength of housing and customers' willingness to pay up.
Demand is strong, and homebuilders aren't rushing to add too much supply
According to Mezger, there is still a lot to like about the housing market for this year and even further into the future. Not only does demand for houses look strong, but the demographics of buyers and the supply of houses is really working in the industry's favor right now. Mezger said:
Here's the surprising thing, though. Despite all of these things that Mezger mentioned, KB Home intends to keep its available housing community level flat in 2018 and possibly 2019. Typically, economic and demographic indicators like these would tell a homebuilder to expand its offerings. It seems, though, that they are all still reeling from the housing collapse and are more comfortable living in a slightly constrained supply market than overreaching for sales growth.
Are rising interest rates really an issue?
If there was one thing that might be a concern for investors in the homebuilding industry, it's the possibility of rising interest rates curbing demand. Mezger believes we are still a long ways off from that being a major concern. Also, if interest rates do start to look worrisome, he views the low amount of housing starts we have seen over the past decade as a reason to think that most customers will simply change their buying preferences than completely exiting the market.
What a Fool believes
KB Home hasn't exactly been the best homebuilder stock to own for a while, but it appears that management finally has its ducks in order to start delivering some better returns to shareholders. Based on the company's most recent performance and signs that the housing market is likely to remain robust for some time, KB Home might be a stock worth watching in 2018.
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