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Strategies & Market Trends : The Residential Real Estate Crash Index

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From: Paul Kern2/13/2006 2:46:11 PM
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DJ KB Home Says Cancellations Up, Orders Down So Far In '06

By Janet Morrissey

NEW YORK (Dow Jones)--KB Home (KBH) has noticed a surge in cancellations and a drop-off in orders in the first two months of fiscal 2006, and if this trend continues, the company said it likely will have to ratchet down its revenue guidance for the year, according to a 10K filing.

The comments appear to be a sign that the sharp drop-off in orders recently reported by luxury builder Toll Brothers Inc. (TOL) may not be limited to the luxury segment as many market experts presumed.

"There are signs that consumer demand in the United States for residential housing at current prices is softening," KB Home said in its 10K, which was filed with the Securities and Exchange Commission on Friday.

The Los Angeles builder noted that the U.S. Census Bureau reported that single-family housing starts in December fell 12% from November, and about 8% from December 2004. Also, the bureau reported that the median sales price for new homes declined approximately 3% in December from a year earlier.

"Our results to date in fiscal year 2006 reflect these broader market trends," the company said, whose fiscal year ends Nov. 30. "In the first two months of the (fiscal) year, we have experienced an increase in home order cancellations and a decline in net orders for new homes when compared to the same period last year."

If this trend continues, "we may be required to moderate our revenue guidance for fiscal year 2006," KB Home said.

However, the company said it doesn't expect to change its earnings-per-share guidance for fiscal 2006 as the company has accelerated its share buyback program. In December, KB Home's board authorized the repurchase of 10 million shares. Since then, the company has repurchased 2 million shares in addition to the 2 million shares it bought back during its fiscal fourth quarter under the previous authorization program.

In December, the company said it expected to generate earnings of $11.25 a share in fiscal 2006, up 18% from fiscal 2005.

UBS analyst Margaret Whelan expects the company's orders to be down 10% in its fiscal first quarter, which ends Feb. 28. However, she remains cautiously optimistic about the company's outlook.

"Based on our channel checks, traffic has been improving steadily since early January, which augurs well for the spring selling season," she said.

She said much will depend on how the company's key spring selling season unfolds.

"Demand is definitely down - there's no doubt about it," she said. However, if the sector faces a "soft landing" rather than a crash, large publicly traded home builders should remain stable, she said. In a soft landing, where orders don't fall off a cliff, she said large builders can grow by gaining market share from smaller, less-liquid builders. "Everything depends on what happens in the spring," she said.

Whelan does not hold shares in KB Home, but her firm has had an investment banking relationship with the company over the past 12 months.

KB Home shares recently traded at $66.30, off 92 cents, or 1.4%, on volume of 1.4 million, compared with average daily volume of 2 million.

-By Janet Morrissey, Dow Jones Newswires; 201-938-2118

(END) Dow Jones Newswires

02-13-06 1401ET

Copyright (c) 2006 Dow Jones & Company, Inc.
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