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KB Home Up 31% YTD: Could KBH Be the Next Big Opportunity?
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KB Home (KBH - Free Report) shares have surged 30.9% year to date (YTD), outperforming the broader Zacks Construction sector’s return of 16.2% and the Zacks Building Products - Home Builders industry’s gain of 22%. In fact, shares of this Los Angeles, CA-based homebuilder have rallied 26% since its second quarter of fiscal 2024 earnings release on Jun 18, outperforming the homebuilding industry’s 23% rise.
In its most recent quarterly report, KB Home posted revenues of $1.71 billion, surpassing analyst estimates by 4.3%. The company's earnings per share (EPS) also exceeded expectations, reaching $2.15, which beat the consensus mark by 20.8%. This performance is noteworthy, particularly given the broader economic challenges facing the housing market. It suggests that KB Home has been effective in managing its operations and capitalizing on opportunities, even in a tough environment.
The company has been benefiting from the strong buyer demand, particularly for built-to-order (BTO) homes, despite the volatility in mortgage rates. The company’s focus on personalization and its ability to offer both quick move-in and personalized homes has been driving growth. Also, KB Home’s pledge to drive stockholder value through a balanced approach of reinvesting in the business, increasing lot count, and returning capital to shareholders through dividends and share repurchases bodes well.
KBH’s YTD Price Performance
Image Source: Zacks Investment Research
Technical indicators suggest continued strong performance for KBH. Notably, the 50-day SMA continues to read higher than the 200-day SMA, signaling the bullish trend. This technical strength underscores positive market sentiment and confidence in KBH’s financial health and prospects.
KBH Stock Trades Above 50 and 200-Day Moving Average
Image Source: Zacks Investment Research
Given the remarkable surge in KBH’s stock price, the pivotal question for investors is whether to buy, hold, or sell shares at this juncture.
Let's examine the stock's underlying fundamentals of KBH to make an informed assessment.
KBH’s BTO Model
The BTO model allows buyers to customize their homes by selecting floor plans, lots, square footage, and personalized finishes based on their preferences and budget. Approximately 65% to 70% of KB Home's business relies on this BTO model. In addition to the customizable options, KB Home also offers finished homes for buyers who prioritize a quicker move-in date over personalization.
The BTO model empowers buyers to influence the final sale price by choosing options such as non-premium lots and standard finishes. More than 70% of KB Home's communities offer homes with square footage below 1,600, which are more affordable while maintaining similar livability and quality.
The BTO model has consistently driven higher monthly absorption rates (sales per community) for KB Home compared to its peer group. In 2019, KB Home achieved a 4.3 absorption rate compared to the peer group's 3.0. This advantage continued in subsequent years, with a peak in 2021 where KB Home's rate was 6.3, far exceeding the peer group's 4.2. Even in 2023, KB Home maintained a lead with a rate of 3.8 compared to the peer group's 3.4. Notably, the company achieved nearly 4,000 net orders in the second quarter of 2024, a favorable comparison relative to the previous year, with an absorption pace of 5.5 monthly net orders per community.
Overall, KB Home's BTO model offers significant benefits, including personalization, affordability, and a strong competitive edge, which have translated into superior sales performance compared to their peers.
KBH’s Mortgage Rate Buydown Program
KB Home has been utilizing mortgage buydowns as a key component of its strategy to maintain strong sales amidst fluctuating mortgage rates. Approximately 60% of KB Home's orders in second-quarter 2024 included some form of mortgage concession, such as buydowns. This indicates that a significant portion of their customers benefit from these incentives, helping to maintain affordability despite higher interest rates.
Yet, the level of mortgage concessions remained flat in the quarter compared to the prior two quarters. This stability suggests that while mortgage rates continued to be volatile, KB Home was able to maintain its pricing strategy without increasing the level of concessions, although they did not reduce them as hoped. Despite the economic environment, KB Home observed a low cancelation rate, attributed partly to the effectiveness of its mortgage concessions in making home purchases more affordable and predictable for buyers.
Shareholder Value Initiatives of KB Home
KB Home has demonstrated a strong commitment to returning value to shareholders. The company’s board authorized a $1 billion share repurchase program, which is significant given the company’s market capitalization of approximately $6.18 billion. For 2024, the company plans to repurchase between $250 million and $400 million worth of shares. This aggressive buyback strategy not only underscores management's confidence in the company's long-term prospects but also enhances shareholder value by reducing the number of shares outstanding, thereby boosting EPS.
KB Home has a solid track record of paying dividends for over three decades, showcasing its commitment to returning cash to shareholders. Recently, the company has increased its quarterly dividends by as much as 67% since July 2023. This makes KB Home an attractive choice for dividend-focused investors, particularly those seeking both income and dividend growth. Check KBH’s dividend history here.
KBH’s Community Growth and Land Investment
The company has been strategically expanding its community count, which is expected to drive its revenue growth. This expansion is part of a broader strategy to achieve higher market share in key regions, which, in turn, supports pricing power and profitability.
KB Home expects its community count to increase by low single digits from a year ago in the third quarter, with a mid to high single-digit increase compared to the year-ago period. By the end of 2024, the company anticipates having 250 to 255 communities, a modest increase from previous levels. This growth in community count is crucial for driving revenues and market share expansion.
The company is significantly increasing its land investment, with a focus on growing its lot pipeline. KB Home’s lot count rose 18% sequentially in the second quarter of 2024, indicating a strong push to secure future growth. The company owns or controls over 65,500 lots at the end of the second quarter of fiscal 2024, positioning it well for sustained growth through 2025 and 2026.
Also, KB Home reduced its build times to about five months, with plans to further reduce them to closer to four months, which enhances inventory turns and the appeal of built-to-order homes. The company experienced a cancellation rate below historical averages in the last reported quarter, signaling strong buyer confidence.
KB Home’s Valuation Comparison
KB Home is trading at a discount relative to the industry it belongs, as shown in the chart below. Despite the company’s shares’ outperformance compared to its industry, KBH’s current valuation is still considered undervalued. This might imply that the market has not yet fully recognized or priced in the company's potential growth prospects or earnings potential. The company is also trading currently at a discount compared to the industry’s big shots like PulteGroup, Inc. (PHM - Free Report) , D.R. Horton, Inc. (DHI - Free Report) and Lennar (LEN - Free Report) .
Image Source: Zacks Investment Research
Upward EPS Estimate Trend for KBH
The Zacks Consensus Estimate for KBH’s fiscal 2024 and 2025 earnings per share rose 2.4% and 2.2%, respectively, in the last 60 days. The upward revision in earnings estimates indicates analysts’ increasing confidence in the stock.
Image Source: Zacks Investment Research
What May Pullback KBH?
From the industry perspective, high borrowing costs are currently hindering home sales and builder sentiment, creating a challenging environment for housing investments. Despite the company’s ability to raise the average selling price of its homes, total revenues have decreased in the second quarter. This revenue contraction suggests that the overall demand for new homes is weakening, likely due to macroeconomic pressures such as high mortgage rates and affordability issues. The decline in total units delivered further underscores this point, highlighting the challenges the company faces in maintaining sales volumes.
The declining backlog of orders—a leading indicator of future revenue—further suggests that KB Home may continue to face revenue pressures in the coming quarters.
The Federal Reserve may reduce interest rates later this year, potentially stimulating housing demand. However, the timing and scale of these possible rate cuts are unclear. Without a noticeable and significant decline in interest rates, a major recovery in housing demand appears unlikely. This uncertainty introduces an additional risk for investors considering an investment in KB Home.
How to Play the KBH Stock?
KB Home has demonstrated resilience in a challenging housing market despite broader industry headwinds such as expensive mortgages and a slowing market. The company's strategic approach to pricing focused on maintaining affordability while optimizing margins, has helped it sustain strong financial performance. Additionally, KB Home’s BTO model has created positive inventory management dynamics, contributing to confidence in their margin guidance for the second half of fiscal 2024.
With a robust liquidity position of $1.73 billion as of May 31, 2024, and no outstanding cash borrowings under its revolver, KB Home is well-positioned to pursue growth opportunities and return capital to shareholders. The company’s disciplined capital allocation strategy, which balances growth with consistent share repurchases, further enhances its potential for margin improvement.
Given its strong operating model, effective incentives, sound pricing strategy, positive EPS estimate revision and discounted valuation, investors may consider accumulating this Zacks Rank #2 (Buy) stock to their portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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KB Home Up 31% YTD: Could KBH Be the Next Big Opportunity?
KB Home (KBH - Free Report) shares have surged 30.9% year to date (YTD), outperforming the broader Zacks Construction sector’s return of 16.2% and the Zacks Building Products - Home Builders industry’s gain of 22%. In fact, shares of this Los Angeles, CA-based homebuilder have rallied 26% since its second quarter of fiscal 2024 earnings release on Jun 18, outperforming the homebuilding industry’s 23% rise.
In its most recent quarterly report, KB Home posted revenues of $1.71 billion, surpassing analyst estimates by 4.3%. The company's earnings per share (EPS) also exceeded expectations, reaching $2.15, which beat the consensus mark by 20.8%. This performance is noteworthy, particularly given the broader economic challenges facing the housing market. It suggests that KB Home has been effective in managing its operations and capitalizing on opportunities, even in a tough environment.
The company has been benefiting from the strong buyer demand, particularly for built-to-order (BTO) homes, despite the volatility in mortgage rates. The company’s focus on personalization and its ability to offer both quick move-in and personalized homes has been driving growth. Also, KB Home’s pledge to drive stockholder value through a balanced approach of reinvesting in the business, increasing lot count, and returning capital to shareholders through dividends and share repurchases bodes well.
KBH’s YTD Price Performance
Image Source: Zacks Investment Research
Technical indicators suggest continued strong performance for KBH. Notably, the 50-day SMA continues to read higher than the 200-day SMA, signaling the bullish trend. This technical strength underscores positive market sentiment and confidence in KBH’s financial health and prospects.
KBH Stock Trades Above 50 and 200-Day Moving Average
Image Source: Zacks Investment Research
Given the remarkable surge in KBH’s stock price, the pivotal question for investors is whether to buy, hold, or sell shares at this juncture.
Let's examine the stock's underlying fundamentals of KBH to make an informed assessment.
KBH’s BTO Model
The BTO model allows buyers to customize their homes by selecting floor plans, lots, square footage, and personalized finishes based on their preferences and budget. Approximately 65% to 70% of KB Home's business relies on this BTO model. In addition to the customizable options, KB Home also offers finished homes for buyers who prioritize a quicker move-in date over personalization.
The BTO model empowers buyers to influence the final sale price by choosing options such as non-premium lots and standard finishes. More than 70% of KB Home's communities offer homes with square footage below 1,600, which are more affordable while maintaining similar livability and quality.
The BTO model has consistently driven higher monthly absorption rates (sales per community) for KB Home compared to its peer group. In 2019, KB Home achieved a 4.3 absorption rate compared to the peer group's 3.0. This advantage continued in subsequent years, with a peak in 2021 where KB Home's rate was 6.3, far exceeding the peer group's 4.2. Even in 2023, KB Home maintained a lead with a rate of 3.8 compared to the peer group's 3.4. Notably, the company achieved nearly 4,000 net orders in the second quarter of 2024, a favorable comparison relative to the previous year, with an absorption pace of 5.5 monthly net orders per community.
Overall, KB Home's BTO model offers significant benefits, including personalization, affordability, and a strong competitive edge, which have translated into superior sales performance compared to their peers.
KBH’s Mortgage Rate Buydown Program
KB Home has been utilizing mortgage buydowns as a key component of its strategy to maintain strong sales amidst fluctuating mortgage rates. Approximately 60% of KB Home's orders in second-quarter 2024 included some form of mortgage concession, such as buydowns. This indicates that a significant portion of their customers benefit from these incentives, helping to maintain affordability despite higher interest rates.
Yet, the level of mortgage concessions remained flat in the quarter compared to the prior two quarters. This stability suggests that while mortgage rates continued to be volatile, KB Home was able to maintain its pricing strategy without increasing the level of concessions, although they did not reduce them as hoped. Despite the economic environment, KB Home observed a low cancelation rate, attributed partly to the effectiveness of its mortgage concessions in making home purchases more affordable and predictable for buyers.
Shareholder Value Initiatives of KB Home
KB Home has demonstrated a strong commitment to returning value to shareholders. The company’s board authorized a $1 billion share repurchase program, which is significant given the company’s market capitalization of approximately $6.18 billion. For 2024, the company plans to repurchase between $250 million and $400 million worth of shares. This aggressive buyback strategy not only underscores management's confidence in the company's long-term prospects but also enhances shareholder value by reducing the number of shares outstanding, thereby boosting EPS.
KB Home has a solid track record of paying dividends for over three decades, showcasing its commitment to returning cash to shareholders. Recently, the company has increased its quarterly dividends by as much as 67% since July 2023. This makes KB Home an attractive choice for dividend-focused investors, particularly those seeking both income and dividend growth. Check KBH’s dividend history here.
KBH’s Community Growth and Land Investment
The company has been strategically expanding its community count, which is expected to drive its revenue growth. This expansion is part of a broader strategy to achieve higher market share in key regions, which, in turn, supports pricing power and profitability.
KB Home expects its community count to increase by low single digits from a year ago in the third quarter, with a mid to high single-digit increase compared to the year-ago period. By the end of 2024, the company anticipates having 250 to 255 communities, a modest increase from previous levels. This growth in community count is crucial for driving revenues and market share expansion.
The company is significantly increasing its land investment, with a focus on growing its lot pipeline. KB Home’s lot count rose 18% sequentially in the second quarter of 2024, indicating a strong push to secure future growth. The company owns or controls over 65,500 lots at the end of the second quarter of fiscal 2024, positioning it well for sustained growth through 2025 and 2026.
Also, KB Home reduced its build times to about five months, with plans to further reduce them to closer to four months, which enhances inventory turns and the appeal of built-to-order homes. The company experienced a cancellation rate below historical averages in the last reported quarter, signaling strong buyer confidence.
KB Home’s Valuation Comparison
KB Home is trading at a discount relative to the industry it belongs, as shown in the chart below. Despite the company’s shares’ outperformance compared to its industry, KBH’s current valuation is still considered undervalued. This might imply that the market has not yet fully recognized or priced in the company's potential growth prospects or earnings potential. The company is also trading currently at a discount compared to the industry’s big shots like PulteGroup, Inc. (PHM - Free Report) , D.R. Horton, Inc. (DHI - Free Report) and Lennar (LEN - Free Report) .
Image Source: Zacks Investment Research
Upward EPS Estimate Trend for KBH
The Zacks Consensus Estimate for KBH’s fiscal 2024 and 2025 earnings per share rose 2.4% and 2.2%, respectively, in the last 60 days. The upward revision in earnings estimates indicates analysts’ increasing confidence in the stock.
Image Source: Zacks Investment Research
What May Pullback KBH?
From the industry perspective, high borrowing costs are currently hindering home sales and builder sentiment, creating a challenging environment for housing investments. Despite the company’s ability to raise the average selling price of its homes, total revenues have decreased in the second quarter. This revenue contraction suggests that the overall demand for new homes is weakening, likely due to macroeconomic pressures such as high mortgage rates and affordability issues. The decline in total units delivered further underscores this point, highlighting the challenges the company faces in maintaining sales volumes.
The declining backlog of orders—a leading indicator of future revenue—further suggests that KB Home may continue to face revenue pressures in the coming quarters.
The Federal Reserve may reduce interest rates later this year, potentially stimulating housing demand. However, the timing and scale of these possible rate cuts are unclear. Without a noticeable and significant decline in interest rates, a major recovery in housing demand appears unlikely. This uncertainty introduces an additional risk for investors considering an investment in KB Home.
How to Play the KBH Stock?
KB Home has demonstrated resilience in a challenging housing market despite broader industry headwinds such as expensive mortgages and a slowing market. The company's strategic approach to pricing focused on maintaining affordability while optimizing margins, has helped it sustain strong financial performance. Additionally, KB Home’s BTO model has created positive inventory management dynamics, contributing to confidence in their margin guidance for the second half of fiscal 2024.
With a robust liquidity position of $1.73 billion as of May 31, 2024, and no outstanding cash borrowings under its revolver, KB Home is well-positioned to pursue growth opportunities and return capital to shareholders. The company’s disciplined capital allocation strategy, which balances growth with consistent share repurchases, further enhances its potential for margin improvement.
Given its strong operating model, effective incentives, sound pricing strategy, positive EPS estimate revision and discounted valuation, investors may consider accumulating this Zacks Rank #2 (Buy) stock to their portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.