Back to top

Image: Bigstock

Looking for a Solid Homebuilding Stock? Buy KB Home (KBH)

Read MoreHide Full Article

KB Home’s (KBH - Free Report) business has been benefiting from solid demand for new homes, reflective of healthy housing market fundamentals stemming from a strengthening job market. Also, the expected rise in mortgage rates is driving sales for new homes in the market.

Also, this Los Angeles, CA-based homebuilder has been riding high given robust backlog level, a strong lineup of community openings and a solid return-focused growth model.

Shares of this Zacks Rank #1 (Strong Buy) company have gained 30% over the past year compared with the Zacks Building Products - Home Builders industry’s 25.4% rally. The stock has also fared better than the Zacks Construction sector and the S&P 500 Index’s 18% and 23.5% rally, respectively. The solid price performance was backed by the above-mentioned factors and an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in 13 of the trailing 14 quarters.

Zacks Investment ResearchImage Source: Zacks Investment Research

Earnings estimates for fiscal 2022 have moved 14.6% north over the past seven days, depicting analysts’ optimism over the company’s prospects. This bullish trend justifies the stock’s addition to investors’ portfolio. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s delve into the driving factors.

Solid Prospects

KB Home has solid prospects for fiscal 2022, given its backlog level and solid return-focused growth model. Backed by these factors, it has the potential of generating $7.2-$7.6 billion in housing revenues in fiscal 2022, up from $5.69 billion reported in fiscal 2021. The company expects year-end community count to improve 20-25% from fiscal 2021. Homebuilding gross income margin (excluding the impact of any inventory-related charges) is expected to improve in the range of 25.4-26.2% this year, suggesting an increase from 24.4% in fiscal 2021. The SG&A expense ratio is expected in the range of 9.4-9.9% for fiscal 2022. This suggests an improvement from 10.1% in fiscal 2021.

At the end of fourth-quarter fiscal 2021, KB Home’s backlog value was $5 billion, which grew 67% year over year. This provided a strong base to support the revenue guidance for 2022 and represents substantial top-line expansion, which, combined with the expectation of a dramatic increase in gross margin to nearly 26%, will meaningfully drive its return on equity.

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 a personalized customer experience through in-house community teams. This highly consumer-centric approach helps homebuyers design a home with the features and amenities of their choice. Not only has this approach given KB Home a competitive advantage over its peers, it has led to low-cost production.

Returns-Focused Growth Plan

Since 2016, KB Home has been pursuing a Returns-Focused Growth Plan that is designed to drive revenues and 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. KB Home is now in a better position to expect meaningful growth in fiscal 2022, attributable to the increase in backlog and its ability to match housing starts to net orders. The company is executing its plan to expand the scale of operations while driving both margins and returns.

Looking ahead, KB Home expects another year of profitable growth, with a sizable increase in the backlog value and community count. The company’s fiscal 2021-end stockholders' equity was $3.02 billion compared with $2.67 billion a year ago and book value per share increased 18% to $34.23. A major improvement in return on equity or ROE is encouraging. ROE increased to 19.9% for fiscal 2021, which marked a year-over-year expansion of more than 800 basis points (bps).

Solid Earnings Growth Rate

KBH has solid prospects, as is evident from the Zacks Consensus Estimate for fiscal 2022 earnings of $9.03 per share, which indicates 49.3% year-over-year growth.

Other Top-Ranked Stocks From the Same Space

Toll Brothers Inc. (TOL - Free Report) currently sports a Zacks Rank #1. This Horsham, PA-based luxury homebuilder builds single-family detached and attached home communities; master-planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities, principally on the land it develops and improves. It has been benefiting from the strategy of broadening product lines, price points and geographies.

Toll Brothers’ earnings for fiscal 2022 are expected to rise 46.3% year over year.

D.R. Horton (DHI - Free Report) currently carries a Zacks Rank #2 (Buy). This Texas-based prime homebuilder continues to gain from industry-leading market share, a solid acquisition strategy, a well-stocked supply of land, lots, and homes along with affordable product offerings across multiple brands.

D.R. Horton’s earnings are expected to rise 27.1% year over year in fiscal 2022.

Meritage Homes Corporation (MTH - Free Report) currently carries a Zacks Rank #2. Its successful execution of strategic initiatives to boost profitability and focus on entry-level LiVE.NOW homes bode well.

Meritage Homes’ earnings are expected to rise 23.7% year over year in 2022.

Published in