D.R. Horton, Inc. (DHI), Lennar Corporation (LEN), KB Home (KBH): Time To Consider The Homebuilders Yet?

After the financial crisis hit, few sectors in the market got hit as hard as the homebuilders. While the housing market is indeed improving, homebuilders such as KB Home (NYSE:KBH) are just beginning to pick up the pieces and get their business back on track. Even after an 18% revenue increase in 2012, the company’s sales are still a whopping 86% below their pre-crisis peak in 2007. While no one (at least not that I’ve spoken with) expects new home sales to hit those levels again, will the combination of favorable home buying conditions get KB Home (NYSE:KBH) back on track?

About KB Home

KB Home (NYSE:KBH) builds and sells a variety of home types, and also provides title and insurance service to homebuyers. The company has operations in ten states including some of those hardest-hit by the housing market collapse, like Florida, Nevada, and Arizona. KB Home built almost 6,300 homes in 2012, an increase of 8.1% from 2011.

The Housing Recovery and What it means For KB

In 2006, at the height of the housing bubble, KB Home (NYSE:KBH) had a sales backlog of over $6 billion worth of new homes. This plunged to a low of $264 million in 2010 before it began to rebound. As of the end of the last quarter, the company’s backlog stood at $704 million, and this is perhaps the most telling number that will come out of the company’s next quarterly report on June 27.

With almost every industry analyst predicting a rise in home sales for the rest of 2013 and the next few years, KB Home is projecting 33% higher revenues this year, the biggest year-over-year increase since the housing bubble burst. Factors like higher buyers’ confidence, more affordable home prices, and near-record low mortgage rates are expected to outweigh such negative factors as tighter lending standards and a less-than-stellar job market in the U.S. In fact, KB Home (NYSE:KBH) is expecting to post its first yearly profit since 2006. To give a clearer picture of just how nasty the collapse of housing was, over the period from 2007 until the present, KB Home lost a collective $36.23 per share, almost 1.8 times the current share price!

Other Homebuilders: Lennar and D.R. Horton

Lennar Corporation (NYSE:LEN), one of the largest U.S. homebuilders, fared slightly better due to its more geographically diverse exposure. KB Home (NYSE:KBH), on the other hand, was disproportionally exposed to the biggest of the “bubble” markets as noted earlier. As a result, Lennar returned to profitability several years ago, and has been in the black since 2010. However, Lennar Corporation (NYSE:LEN) trades at a premium valuation of 21.1 times this year’s earnings, which is a significant premium for an uncertain housing recovery.