KB Home's full-year 2013 earnings: Must-know takeaways (Part 5 of 6)
KB Home is a turnaround story
Like virtually every builder, KB struggled with cash burn in the post-bubble years. KB made some strategic decisions to focus on its most profitable metropolitan statistical areas and spend heavily, buying land at rock-bottom prices. Plus, it’s dealing with a lawsuit. As KB executes its turnaround, it will almost inevitably hit some bumps on the road. Last quarter was one of them. KBH attributed the drop in orders to a shift in focus to the more profitable and fast-growing coastal markets, and also some delays in new communities.
Earnings per share
Net income increased to $28.1 million on a GAAP basis, from $7.7 million the year before. These numbers include some special charges. On an apples-to-apples basis, adjusted earnings per share increased from $0.10 in the fourth quarter of 2012 to $0.46 in the fourth quarter of 2013. For the full year, net income was $40 million, or $0.46 a share versus a loss of $59 million or $0.76 a share for 2012. This was the first year of positive net income since 2006.
Costs will rise in the future
The homebuilders have been in an enviable position over the past year, with the ability to raise prices pretty much at will, and costs that have been increasing at a slower pace. That dynamic is definitely going to change. Labor costs are increasing—especially in the skilled construction trades. Because the housing bust was so long and so deep, many construction workers left the industry to pursue new careers, primarily in the energy sector and trucking.
Second, as home price appreciation begins to cool, the builders will have to focus on increasing volume to drive revenue growth. This means increased competition for building materials, which means lower gross margins as cost of goods sold increases. This will act as a drag on profitability going forward, although demand should remain strong.
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