The housing market in the U.S. is recovering, and KB Home (KBH, Financial) is taking advantage of it. Though the company is facing headwinds, its overall performance is commendable. However, management thinks that the company can perform better going forward. Still, there are some key areas of focus for KB Home that are expected to drive its growth further in the future. Let us take a look.
A look at the problems
The drop in the gross margin is a grave problem for the company, and it has to take some serious steps to deal with it. Seeing the weaker trends, KB Home is expecting the gross margin to drop in the first quarter but it thinks that the gross margin will turn back to its normal levels in the rest of the fiscal year. In addition, the traffic levels per community for KB Home remain strong. Also, the company is also having good back logs which are expected to generate a higher ASP for it. This will also position KB Home to see better revenue growth in 2015.
The growth strategy
In order to support its growth strategy, KB Home is engaged in minimizing the overhead costs to improve its margins. Moreover, the company has also made significant investments in land which will result in the growth of community count. The long-term prospects of KB Home also look strong as with the investments the company has made significant progress in its land pipeline. KB Home will be emphasising much on this initiative, also enhancing its asset efficiency which will result in improving its returns on the invested capital.
In this regard, KB Home is now engaged in evaluating some other potential opportunities. This will help the company to more quickly monetize them so that it can be beneficial for KB Home in the long term as well. Moreover, the company is also now focusing on the assets that are productive. Under this, it has recently sold its last remaining land position in Atlanta where it has no ongoing operations. This laser focus by the company will help it to improve its margins even in the soft market conditions. Moving on, to quickly capture the long term goals, it has brought certain alterations in its corporate strategy. Under this change, KB Home is increasing its efforts to reactivate properties which it focused for future development in the past in some of the key markets of its operation.
Conclusion
In 2015, KB Home will be highlighting the improvement in its asset efficiency which will lead to better generation of returns on its invested capital. With a trailing P/E of just 1.46 the stock is dirt cheap and the forward P/E of 10.73 the stock is expected to improve its earnings in the near term. The catchy thing about the stock is its impressive profit margin of 38.25%. Thus with an investment perspective, I would like to suggest the investors to definitely include KB Home in their portfolio as the stock is expected to grow more in the near term mainly due to the recovering housing market in the U.S.
