KB Home (KBH) buys land and builds homes. In 2006, the company sold 32,124 homes across 15 states, largely in the Southwest and Western United States. The company also builds homes in France, with 15% of its business coming from developments in that country. KBH targets first-time and active buyers, offering single-family detached homes, condominiums, and attached multi-family communities. At an average home selling price of $277,000, the company offers homes that are slightly more expensive than the national median home price of around $210,000. Through its financing segment, the company also offers buyers mortgage financing on their home purchase.
The company operates in a highly cyclical industry. New home construction, home prices and new home sales volume are heavily dependent upon job growth, interest rates, and the business cycle at large. Low interest rates and high job growth bode well for homebuilding, but as the recent subprime lending crisis and depressed housing market has illustrated, things can sour quickly and the business can be difficult to predict. Key homebuilding numbers, such as housing starts and existing home sales have continued to come in weak of late. Homebuilding is highly competitive and marked by few barriers to entry, low profit margins, and high financial leverage.
Below is a breakdown of company revenue by region, along with a chart depicting the company's revenue and operating profit. Recently, the company's operating profit has been hit largely by falling home prices. As discussed below, when home prices in the company's geographic operating areas fall, the company must either write down the value of its unsold home inventory or, when it does sell the inventory, take a substantial hit to its margins. This is largely because of the lag time between constructing and then selling a new home -- if the company builds a home at $150,000 and expects to sell it at $200,000 given market prices, any change in the market value of the home erodes the originally anticipated $50,000 profit because the construction expense is largely fixed. 
The following is a table of relevant operating metrics, including the number of homes sold, average price per home and the company's stated housing inventory at year end. Note that the company has sold an increasing number of homes at a higher average selling price in each of the last three years. However, this has not kept pace with the increases in cost of construction and the effect of falling home price (or slower than anticipated home price growth).
|Inventory year end||$4,143||$6,128||$6,455|
The accepted accounting principles for homebuilders can be a bit convoluted, and it is important that investors understand certain non-intuitive accounting methodologies. Here are a few notable accounting conventions for builders that may not be immediately clear to investors:
The company competes against a highly fragmented base of other homebuilders. These companies may be national or local players and given the highly competitive nature of the industry, competition is stiff and often marked by low margins and low returns on capital. The company also competes for buyers with existing homes that have hit the market, and competes more broadly with other housing alternatives such as apartments, condominiums, and mobile homes.
Below is a table comparing metrics from several competing publicly traded homebuilders. Note that no company has anything close to a dominant national market share, and the industry generally is marked by low operating margins (and high debt to finance construction expenses).
|Company||Revenue (TTM)||Operating Margin||2006 Closings||Debt/Equity||Market Share|
|D.R. Horton (DHI)||$11,300||8%||53410||0.783||4.65%|
|Pulte Homes (PHM)||$10,750||0%||41487||0.771||3.61%|
|Beazer Homes USA (BZH)||$4,270||4%||17500||1.194||1.52%|
|Ryland Group (RYL)||$3,530||9%||15392||0.74||1.34%|
|M.D.C. Holdings (MDC)||$3,470||1%||13123||0.576||1.14%|
|Standard Pacific Lp (SPF)||$3,310||7%||10763||1.473||0.94%|
|Toll Brothers (TOL)||$4,650||16%||8601||0.642||0.75%|