Tracey Ryniec

Bull of the Day: KB Home (KBH)

by

December 03, 2013 |
KBH

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The homebuilder stocks went from "hot" to "not" in the course of the last six months of 2013. KB Home (KBH - Analyst Report), however, is still expected to see triple digit earnings growth in Fiscal 2013. Is this Zacks Rank #1 (Strong Buy) now a steal?

KB Home is one of the largest homebuilders in the United States, having built over 500,000 homes across the country.

It has strung together 3 big earnings beats as the housing market recovery has gained momentum but investors have been sour of the homebuilding sector for the last several months.

Revenue Up in Q3

The fundamentals are there. On Sep 24, KB Home reported its third quarter 2013 results and beat by 45% as earnings were $0.29 compared to the Zacks Consensus of $0.20.

Revenue jumped 29% to $549 million from $424.5 million in the year ago quarter. Each of the company's homebuilding regions saw revenue rise over 25%.

The homebuilders have gained back pricing power as well. The overall average selling price grew to $299,100 in the quarter, up 22% or $54,000 from the third quarter of 2012. Gross profit also improved, rising 150 basis points to 18.2% from 16.7% a year ago.

Higher Mortgage Rates Slow Down Sales

Housing was the best performing sector for stocks in 2012. It looked like 2013 might be a repeat until the Fed started talking about a possible taper in September. The taper worries sent treasury yields higher which, in turn, raised mortgage rates substantially off their lows.

Higher mortgage rates put a crimp on housing sales starting over the summer. While the Fed didn't taper in September after all, and treasury yields have since gone down, mortgage rates still remain at least a point above their lows of 2012.

"The fundamentals of the current housing recovery are firmly in place, supported by low inventory levels, an improving economy and positive demographic trends," said Jeffrey Mezger, CEO.

"Given these factors, we believe that the recent slower pace of the recovery caused by an up tick in mortgage interest rates is a temporary effect, and we expect to see steady upward demand for housing as consumers adjust to both higher rates and pricing," he added.

Shares Sold Off

After shares soared to new multi-year highs over the past 2 years, investors got spooked by higher mortgage rates over the summer and shares have been trending lower since.

KB Homes shares are off over 30% from their 2013 highs.

The analysts believe that the housing market is in the beginning of a multi-year recovery. It will, of course, have fits and starts. It is experiencing one of those this year.

Shares, however, are much cheaper. KB Home now trades with a forward P/E of 28x, which is much lower than over the summer.

Earnings growth is also still expected to be strong for the rest of 2013 and into fiscal 2014. Earnings are expected to grow 170% this year and another 90% in fiscal 2014.

KB Home is expected to report fourth quarter results around Dec 19. Stay tuned for its outlook about 2014.

KB Home is now cheaper than at any other time this year yet fundamentals remain intact. Look to buy it ahead of the spring home buying season in 2014.

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Turnaround Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.

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