HomeMost PopularKB Home Remains A Buy After Solid Fiscal Q3 Results

KB Home Remains A Buy After Solid Fiscal Q3 Results

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Remember when I rated KB Home (NYSE:KBH) as a strong buy last September? Well, it turns out that recommendation was spot on. Since then, the stock has rallied over 70%, surpassing our conservative price target. Even with the release of the latest fiscal Q3 earnings report, I still believe KB Home is a solid investment choice. Let’s dive into the details.

KB Home Reports First Quarter Earnings

In the company’s fiscal third quarter, KB Home reported earnings of $1.80 per share on revenue of $1.59 billion, surpassing expectations by $0.38. Although earnings were slightly down from last year due to a decline in revenues and margins, KBH has generated an EPS of $5.18 this year and is expected to earn about $7 for fiscal 2023. Despite the challenges faced by the housing market, KB Home’s earnings have remained strong.

During the quarter, KB Home’s deliveries declined by 7% to 3,375 houses with an average sales price of $466k, primarily due to lower prices per square foot and a mix shift. Homebuilding gross margins also declined, but lower construction costs helped offset the effects. Despite mortgage rates remaining above 7%, demand remained steady, with net new orders rising by 52% to 3,097. The backlog of homes stands at 7,008, signaling stability in the market. This positive trend indicates that KB Home is well-positioned to continue building and delivering homes at a similar pace while generating cash flow.

KB Home’s focus on first-time and second-time homebuyers is another reason for its investment attractiveness. With the population of Americans in their late 20s to early 30s increasing, the potential pool of first-time homebuyers is growing. As millennials enter their prime household formation years, KB Home can expect ample demand for its product.

The broader housing market also supports KB Home’s prospects. Despite temporary setbacks caused by interest rate increases, the U.S. housing market has shown resilience and is likely to continue its upward trajectory. Supply constraints, driven by existing homeowners reluctant to move due to higher interest rates, have resulted in a housing shortage. This shortage, combined with millennials entering the market, provides a favorable environment for KB Home’s sustained profitability.

KB Home’s solid operating performance, strong balance sheet, and buyback program further enhance its investment appeal. With the stock trading around book value per share of $48.29, the company’s value-added from building houses with healthy gross margins is not fully reflected. Additionally, KB Home’s focus on reducing debt and increasing cash flow allows for ongoing share repurchases, which can potentially boost earnings per share. With a conservative target of 8x earnings, the stock could see a 16% upside, and even stronger returns over the long term due to the sustained demand for housing.

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