KBH - Valens Credit Report - 2020 05 15
Cash bond markets are grossly overstating credit risk with a cash bond YTW of 5.046% relative to an Intrinsic YTW of 1.986%, while CDS markets are overstating credit risk with a CDS of 269bps relative to an Intrinsic CDS of 175bps. Meanwhile, Moody's is materially overstating credit risk with its highly speculative, high-yield Ba3 rating five notches lower than Valens' IG4+ (Baa1) ratingIncentives Dictate Behaviorâ„¢ analysis highlights mostly positive signals for credit holders. KBH's management compensation framework should focus management on improving all three value drivers: top-line growth, margins, and asset utilization, which should lead to Uniform ROA expansion and increased cash flows available for servicing obligations
Earnings Call Forensicsâ„¢ analysis of the firm's Q1 2020 earnings call (3/26) highlights that management generated an excitement marker when saying they do not expect to see huge market disruptions in terms of pricing
KB Home is a homebuilding company. The company builds a variety of homes designed primarily for first-time and first move-up, as well as second move-up and active adult homebuyers, including attached and detached single-family residential homes, townhomes and condominiums. The company's financial services operations provide various insurance products to its homebuyers in the markets where it builds homes and provide title services in certain of those markets. The company's financial services operations also provide mortgage banking services, including residential consumer mortgage loan originations, to its homebuyers indirectly through KBHS Home Loans, LLC, a joint venture the company formed with Stearns Lending, LLC.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
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