First out this morning (Tuesday) was this: “Oil crash may whack earnings of top U.S. homebuilders in Texas” (Article Link). Well that’s obvious. I wrote a post a few weeks ago in which I surmised that the crashing price of oil was likely the U.S. economy’s “black swan.” Sorry, it doesn’t take Einstein to figure that out. In my year-end investor letter I stated that the housing markets in States like Texas and Colorado were going to get hammered hard. I’m already seeing high-end housing inventory all around Denver pile up like litter in a junkyard.
THEN, KB Home (KBH) reported its fourth quarter (fiscal) ending November:
- *KBH SEES 1Q BOTTOM LINE ABOUT BREAK-EVEN (against expectations of a 17c rise!)
- *KB HOME CFO SAYS FIRST-QUARTER MARGINS EXPECTED TO BE DOWN
- *KB HOME PULLED OUT OF `COUPLE’ HOUSTON LAND DEALS, CEO SAYS
Hmmm…the stock was annihilated today, down 16.3%. But guess what? 45% of KBH’s sales revenue is derived from the West Coast – primarily California. Yes, the Company reported “impressive” year over year revenue and backlog gains, but guess what? That’s rear view mirror stuff. You can completely ignore its reported GAAP net income number because 90% of it was from a NON-CASH massive income tax benefit it accrued into earnings.
KBH is a viper’s nest of accounting gimmicks and questionable use of capitalized interest, which also serves to inflate its GAAP earnings. Oh, by the way, did anyone notice that KBH’s Q4 cancellation rate was 37%? That means you can slash their new order and backlog report by at least 37%.
KBH’s debt/equity is 167%. Once KBH is forced to start writing down the value of massively bloated inventory, it’s book equity to hit zero or go negative. It’s inventory value is more than 200% of its book equity. This stock is going to hit the wall eventually.
You can ignore reality but you can’t ignore the consequences of reality (Ayn Rand). The reality is that my assessment of the housing market is correct.