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Bull of the Day: KB Home (KBH)

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KB Home (KBH - Free Report) is having a great spring home buying season even as mortgage rates rise. This Zacks Rank #1 (Strong Buy) just raised its dividend 25%.

KB Home is one of the largest homebuilders in the United States. Headquartered in Los Angeles, it operates in 47 markets, and has built over 680,000 homes in its 65-year+ history.

KB Home Raises Its Dividend and Announces a $1 Billion Share Repurchase Plan

On Apr 18, 2024, KB Home announced that the Board of Directors had authorized the repurchase of up to $1 billion of stock. This authorization replaces the prior one, which had just $113.6 million remaining.

In 2024, the company expects to buy back between $200 million and $400 million in shares. That includes the $50 million it has already completed in the fiscal first quarter.

The Board also raised the quarterly cash dividend by $0.05 to $0.25 from $0.20. The 25% increase results in an annual dividend of $1.00 per share which is a yield of about 1.6%.

The new dividend will be payable on May 23, 2024, to stockholders of record as of May 9, 2024.

KB Home is shareholder friendly. From 2020 to 2023, KB Home returned $951 million in cash to shareholders through dividends and share repurchases.

5th Earnings Beat in a Row

On Mar 20, 2024, KB Home reported its fiscal first quarter 2024 results and blew by the Zacks Consensus Estimate by $0.20. Earnings were $1.76 versus the consensus of $1.56.

This was the company's fifth earnings surprise in a row.

KB Home said it generated solid results that were either "at or above the high end" of their guidance ranges.

It saw positive momentum in demand as buyers flocked to sales centers once again. Net orders rose 55% to 3,323 due to improved demand and a lower cancellation rate compared to the year ago quarter.

The cancellation rate as a percentage of gross orders improved to 14% compared to 36% a year ago. Gross orders were also up 15% to 3,873.

One of the most important metrics for the home builders is gross profit margin. KB Home's gross profit margin in Q1 was 21.6%, just slightly less than last year's margin of 21.8%.

On Mar 20, KB Home said that first quarter momentum had continued into the start of the second quarter as well.

Analysts Bullish on Fiscal 2024 and 2025

The analysts have been cautious on the homebuilder stocks since the Fed started raising rates in Mar 2022. Earnings did come down from the 2021 highs as mortgage rates rose and sales slowed.

But home buyers appear to be adjusting to the higher rates. And with such a low inventory of existing homes, many buyers are looking to new homes instead. The builders still have pricing power.

6 estimates have been revised higher for KB Home for fiscal 2024 in the last month. This has pushed the Zacks Consensus up to $8.01 from $7.59 during that time. That's earnings growth of 13.9% as KB Home made $7.03 last year.

They are equally bullish on next year as well. The fiscal 2025 Zacks Consensus Estimate has jumped up to $8.72 as 6 estimates have been revised higher in the last 30 days. That's another 8.8% earnings growth.

Zacks Investment Research
Image Source: Zacks Investment Research

The Stock is Dirt Cheap

Mortgage rates are back over 7% again in Apr 2024. That has spooked Wall Street again and they have sold off shares of KB Home over the last month. It is down 8.6% over that period.

Here's what the 1-year chart looks like compared to the S&P 500.

Zacks Investment Research
Image Source: Zacks Investment Research

The stock remains dirt cheap even though it hit new all-time highs earlier this year. KB Home trades with a forward P/E of just 7.6.

It also has a PEG ratio of just 0.7. A PEG ratio under 1.0 usually indicates a company has both growth and value. That's a rare combination.

For investors interested in a home builder with a rising dividend and earnings growth, KB Home should be on your short list.

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