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KB Home (KBH) to Benefit From Returns-Focused Growth Plan

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Indeed, a few analysts are skeptical about the U.S. housing market prospects, as many builders are witnessing lighter buyer traffic in recent weeks since record-high prices have been pushing potential buyers away despite a low borrowing rate environment.

Nonetheless, KB Home (KBH - Free Report) is among the homebuilding companies that remains well positioned, courtesy of impressive performance, Returns-Focused Growth plan, built-to-order approach and robust backlog level.

The company’s shares have gained 19.5% year to date, steadily outperforming the Zacks Building Products - Home Builders industry’s 15% rally. Also, it has outperformed the S&P 500’s 14.7% rise in the said period. The solid performance can be attributed to an impressive earnings surprise trend. KB Home’s earnings surpassed the Zacks Consensus Estimate in 20 of the trailing 21 quarters.

Also, earnings estimates for fiscal 2021 and 2022 have moved up 3.2% and 3.9%, respectively, over the past seven days. This positive trend signifies bullish analysts’ sentiments and justifies the company’s 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.

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What Makes the Stock an Attractive Pick?

Stellar Performance: KB Home recently reported solid second-quarter fiscal 2021 results, wherein earnings beat the Zacks Consensus Estimate by 16.3% and grew a significant 173% from a year ago. Although the top line missed the consensus mark, it grew 57.7% year over year.

The company reported solid first-half fiscal 2021 results, with robust backlog level, a strong lineup of community openings and solid return-focused growth model. Its revenues grew 29.8% and earnings were up more than 111.8% in the first half of fiscal 2021. The number of homes delivered grew 21% from the year-ago level to 6,368 units. Further, average selling price or ASP increased 7% from a year ago to $404,100. Pretax income surged 118% to $297.2 million during the period.

Strong Growth Initiatives: KB Home has been pursuing a Returns-Focused Growth Plan since 2016 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.

It has been successfully executing the core business strategy (i.e. KB2020), which aims at boosting scale in the existing geographic footprint, improving profitability per unit, generating higher operating margin and driving earnings, while generating positive cash flow to redeploy for growth as well as debt reduction.

The plan has helped KB Home generate significant cash from operations of $6 billion from 2018 through 2020. 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 fiscal 2020.

Built-to-Order Approach: The company’s Built-to-Order process provides buyers with a wide range of choices in major aspects of their future home and personalized customer experience through in-house community teams. This highly consumer-centric approach helps homebuyers design a home with features and amenities of their choice. Not only has this approach given KB Home a competitive advantage over peers, it has led to low-cost production.

The company’s built-to-order homes (first-time buyers represented 64% of fiscal second-quarter deliveries with the built-to-order approach) help it generate higher revenues from premiums (lots, plans, and elevations) as well as design studio and structural options.

Robust Backlog: Backed by the above-mentioned tailwinds, net order growth for second-quarter fiscal 2021 led to a 196% year-over-year increase in net order value, which in turn fueled the expansion of backlog value to $4.29 billion, reflecting a 126% year-over-year rise on roughly 10,034 units. Owing to this higher backlog, the company is confident of generating increased revenues in fiscal 2021.

Other Stocks to Consider

Other top-ranked stocks in the same space include M.D.C. Holdings, Inc. (MDC - Free Report) , Lennar (LEN - Free Report) and Meritage Homes Corporation (MTH - Free Report) , each sporting a Zacks Rank #1.

M.D.C. Holdings’ earnings for 2021 are likely to increase 59.4%.

Lennar’s fiscal 2021 earnings are likely to grow 73.4%.

Meritage Homes has expected earnings growth rate of 32.9% for 2021.

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