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  1. Home
  2. / Investing
  3. / Industrials

Cramer: Don't Let the Fed Read the KB Home Conference Call

If that happens, the Fed will raise interest rates and wreck the economy.
By JIM CRAMER
Mar 24, 2016 | 11:35 AM EDT
Stocks quotes in this article: KBH

Memo to the Federal Reserve: Please do not read the KB Home (KBH) conference call. You will tighten four times this year, and if you do, you will be getting it wrong.

If you don't know KB Home, it is a national homebuilder concentrating in Arizona, California, Colorado, Florida, Metro DC, North Carolina, Nevada and Texas.

Those of us who have followed this industry through its multiple year travails and booms and busts know that this homebuilder is perhaps the most notorious of the West Coast boom/bust builders, with the stock rising from $14 in October 2001 to a peak of  $84 in the summer of 2005 and then a decline, first to the $50s in the beginning of 2007 before ultimately falling to $5 in the depths of the Great Recession in February 2009. It then subsequently rallied back to $25 in the spring of 2013 and has come back to $13 since then.

Yep, this one is the coiled and flattened spring of the group. Right now, because of its heavy emphasis on the Bay Area, the coil is springing strongly, and the quarter it reported yesterday, $0.14 vs. a $0.11 estimate, with $678 million in revenues when only $637 million was expected, was astonishing.

Not only did it see a 23% growth in deliveries and a sizable year-end backlog, but it gave a rosy forecast. As CEO Jeff Mezger said on the call "while it is still early in the spring selling season, we are encouraged by the traffic levels and the steady demand we are seeing, and are optimistic as we continue to build backlog."

So what's worrisome here? This company's just a billion in market capitalization and it doesn't have the reach of the other major homebuilders, but it is seeing labor constraints, higher land prices, and  risings costs along the way for everything from "framing and concrete." As Mezger told the analysts, "there is definitely still a shortage of labor and it varies around the system."

The Bay area seems particularly stretched. "I don't think you're anywhere near a bubble price, certainly not at the prices points we're playing at," Mezger said. However he quickly added: "sad to say, but $1.5 million in an affordable house in the Bay Area right now."

Ouch.

Now, hopefully, a thoughtful Fed member would listen to the entire call and discover the softness in another part of the country: Houston, where sales are down 20% because of the plummet in oil. The rest of the country seems well in control, too, so it isn't like we are seeing a national spiral as we saw in the mid 2000s. Plus, credit remains consistent, which, to me, means consistently tight, with FICO scores still high and money not being lent anywhere near as freely as in the bad old days.

But with profit margins up 90 basis points to 16% and with a shortage of labor varying around the system, KB could be the poster boy for the need to raise rates to cool off California, even as it would definitely impede the rest of a just fine country. Or, in other words, a national rate hike because of a strong California business would be a mistake; but it is a mistake that several of the Fed presidents seem to want to make.

As far as KB Home goes, I haven't been a fan of the stock in ages and it's tough to cotton up to a homebuilder in a tightening cycle. As the late stock whiz Marty Zweig always admonished us, "don't fight the Fed."

However, the company bought back 9% of its stock this quarter because the price of around $13 before the close is so well below its $19.22 book value that it's incredible accretive and the buyback will continue.

I think that, given its unique land bank in the most heavily constrained areas of California, the company's worth more to any other builder, and it is logical that it be bought by one of them. So here's the issue in a nutshell: you would want to own KB Home and reap the benefits of higher earnings and a possible takeover bid, if it weren't for the Fed, which could hear how strong the business here really is and crush the opportunity with three rate hikes between now and December.

With this inconsistent Fed, all I can say is that this one's too close to call.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Industrials | Real Estate

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