Homebuilders: Look Out Below

KB Home released its Q3 earnings report yesterday.  This is what the stock market thought of KBH’s numbers (click on graph to enlarge):

KBH_Stock_Q3

The stock is down nearly 10% in two trading days despite the “bullish” new home sales report from the Census Bureau (more on that later).  KBH reported another decline in actual deliveries.  It also implemented some serious earnings “management” devices to make its net income appear larger than it really was.  I suspect that when they get around to releasing their 10-Q with a cash flow statement in it, we’ll see that it once again generated a cash flow loss from operations.

KBH was the first homebuilder report I released in which I showed in detail why KBH will eventually trade below $5, if not go bankrupt.  It’s debt is now higher  than it was at the peak of the housing bubble, despite the fact that its unit sales are about 1/3 the level of its bubble peak.

In fact KBH’s debt + other liabilities is now as great as its inventory.  Given that it’s not generating positive cash flow from operations now, with home prices and sales volume starting to turn a lower, this means that the value of the inventory will start to decline and it will be written down.  Theoretically, if a homebuilder’s inventory value exceeds its amount of debt and no meaningful cash flow is being generated to service its debt, the equity is worth zero.

Please check out my report on KBH and check out the other two, so you can be positioned appropriately ahead of the next earnings reports from those companies, both of whom warmed outright in their latest 10-Q that the outlook for the housing market is growing weaker:    Homebuilder Short Reports.

As you can see from the graph above of KBH, which confirms what I’ve been asserting, when these homebuilders go bad, they go bad quickly.

6 thoughts on “Homebuilders: Look Out Below

  1. Hello Dave,

    “The Street” rates KBH a buy? I haven’t bought your report but my power of observation tells me this is outright Major League BS. I recommend everyone that loves KBH go out and buy as much Alibaba as possible and to also bone up on Amazon. Just outright thieves with no fiduciary responsibility.

    Tramps and Thieves all of them.

    1. Shadow inventory in that area is about the same size as the listed inventory. I bet most of those people have been living in their home mortgage payment free for close to 3 years.

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