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KB Home (KBH) Gains From High Orders, Returns-Focused Growth Plan

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KB Home (KBH - Free Report) has been gaining strength, courtesy of resilient U.S. housing momentum, solid order growth and the returns-focused business model.

KB Home, similar to other homebuilding companies like Lennar (LEN - Free Report) , D.R. Horton (DHI - Free Report) and Toll Brothers (TOL - Free Report) , has been witnessing a significant increase in demand over the past several months on the back of resilient housing market. The company’s net orders began to rebound significantly from April 2020, courtesy of rise in housing demand. Continuous reduction in mortgage rates have boosted customers’ desire to own a home amid the pandemic, which caused third- and fourth-quarter net orders to move to 15-year highs. Moreover, KB Home's ongoing execution of the returns-focused growth plan, balanced approach of allocating cash flow and improvement in gross margin are commendable.

Meanwhile, the company’s shares have gained 10.6% over the past six months, underperforming the industry’s 12.4% rally. Nonetheless, earnings estimates for fiscal 2021 have moved 9.8% upward over the past seven days. This positive trend signifies bullish analysts’ sentiments and justifies its Zacks Rank #1 (Strong Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.


Major Growth Drivers

Solid Backlog Signal Solid Fiscal 2021 Prospects: The company started fiscal 2021 with solid momentum, robust backlog level, a strong lineup of community openings and strong returns-focused growth model. Backed by these factors, it has the potential of generating as much as $6 billion in housing revenues and double-digit operating margin this year. Backlog at fiscal 2020-end totaled 7,810 homes (as of Nov 30, 2020), up 54% from a year ago. Potential housing revenues from backlog also grew 63% from the prior-year period to $2.96 billion. This marked the highest fourth quarter-end backlog (in terms of both homes and value) since 2005.

Strong Returns-Focused Growth Plan: Since 2016, KB Home has been pursuing a Returns-Focused Growth Plan that is designed to drive revenues, homebuilding operating income margin, return on invested capital, return on equity and leverage ratio. The plan’s main components are executing the company’s core business strategy, improving asset efficiency and monetizing significant deferred tax assets.

This plan has helped KB Home generate significant cash from operations of $6 billion (as of fiscal 2020) over the past three years. Approximately 87% of this cash has been re-invested for future growth through land acquisitions and development. It has returned approximately $102 million in cash to stockholders in the form of dividends and share repurchases from 2018 through 2020.

Built-to-Order Approach: The company’s Built-to-Order process provides buyers with a wide range of choices in the major aspects of their future home and personalized customer experience through in-house community teams. Its built-to-order homes (which represented more than 90% of fiscal fourth quarter net orders) provides higher revenues from premiums (lots, plans, and elevations), as well as design studio and structural options. Owing to this model, net order growth for fourth-quarter fiscal 2020 led to a 50% year-over-year increase in net order value, which in turn fueled the expansion of backlog value to nearly $3 billion. On the back of higher backlog, the company expects to achieve significant growth in its scale and profits in fiscal 2021.

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