Homebuilders definitely are not the hottest industry on FinTwit, but I think they deserve some attention.

I’ve recently been looking at KB Home $KBH

I’m interested in it for 3 reasons:

1. Great Product
2. Improving Profitability
3. Macro-Economic Trends

(THREAD)

1. KB functions on a “Built-to-Order” model. Customers can pick out their lot, modify the floor plan, and later pick out their finishes in a KB design studio.

It is a highly interactive, “customer-first” experience.

1. The Consumer Affair ratings for major home builders (out of 5).

KB Home: 4.7
DR Horton: 1.3
Meritage Homes: 1.5
Lennar: 1.2
Toll Brothers: 1.3



In an industry known for bad experiences, KB seems to be distinguishing itself.

1. The Built-to-Order model also minimizes risk for KBH.

It typically doesn’t start building a house until a customer has picked it out and placed a deposit on it.

Cancellations are common, but refunds are given to maintain good relationships and often lead to sales later on.

2. A few years back KBH launched a “Returns-Focused Growth Plan.”

The purpose of the plan was to reduce leverage and increase profitability. As seen in the table below they have made some impressive improvements.

2. One thing that should be noted is that KBH improved ROE while reducing debt to capital ratio. This is very impressive.

A DuPont Decomposition shows how reducing leverage lowers ROE, but KBH was improving profitability enough that it overcame this negative impact.

3. There are two major macro-economic tailwinds that should support KBH.

First, interest rates are historically low and have been falling. This stimulates demand for new homes because mortgages and payments are less expensive.

3. Second, the work-from-home revolution could just be kicking off.

With people spending more time in their homes, it is likely that new homes will need to be built to accommodate new routines.

Also, highly-paid professionals are no longer tethered to pricey urban apartments.

3. There could be an unprecedented move to the suburbs.

I think that KB Home is well-positioned to be a major beneficiary of this.

COVID-19 has impacted the business, but demand has started to pick up in the most recent quarter.

The CEO said that the business has become more efficient due to the pandemic and expects that the digital buying process it has developed will positively impact the business

It currently operates in 8 states and seeks to be a top 5 home builder in any market in which it does business.

It has done a great job improving profitibailty.

The question now is whether it will be able to capitalize on the trends and significantly grow the top-line.

Thanks for reading! This was an interesting company to look at because it is pretty different than a lot of the companies discussed on FinTwit.

I recently started a small-position (<1% of my portfolio)

Let me know if you have any questions, insights, or anecdotes about KB Home.