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KB Home (KBH) Up 38.6% Year to Date: Momentum Here to Stay

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KB Home’s (KBH - Free Report) shares have rallied 38.6% so far this year compared with its industry’s 25.7% growth. The company has been riding high on Returns-Focused Growth Plan, Built-to-Order approach, Land Acquisition & Development plan, and strong housing market fundamentals.

On Jun 26, the company reported better-than-expected results for second-quarter fiscal 2019. Both the top and bottom lines surpassed the Zacks Consensus Estimate by 9.3% and 30.8%, respectively, in the quarter. The upside was mainly attributable to continued progress of the Returns-Focused Growth Plan, given stellar average community count growth and solid housing industry. Notably, shares of this notable homebuilding company gained nearly 8% on Jun 27, 2019, post the impressive quarterly results.

Let’s delve deeper into the factors that substantiate its Zacks Rank #2 (Buy).

Returns-Focused Growth Plan: KB Home’s Returns-Focused Growth Plan, which is intended to drive revenues, margins, return on invested capital, return on equity and leverage ratio, bodes well. The main focus of this plan is to execute core business strategy, improve asset efficiency and monetize significant deferred tax assets.

In fiscal 2018, the company’s return on equity increased 440 basis points (bps) year over year. Further, it expects 10-15% return on equity in fiscal 2019. Also, in fiscal first quarter, its housing gross margin grew 100 bps, followed by a 10-bps improvement in the fiscal second quarter. The upside reflected lower amortization of previously capitalized interest and a change in its accounting for certain model complex costs.

It focuses on the core KB2020 business strategy, which aims at boosting scale and footprint, as well as improving profitability and operating margin. Notably, during the fiscal second quarter, it achieved average community count growth of 17% across the regions.

Built-to-Order Process: KB Home is a highly consumer-centric company. Its Built-to-Order approach provides buyers with a wide range of choices with a personalized customer experience through in-house community teams. Not only has this approach given KB Home a competitive advantage over its peers, but also has resulted in low-cost production.

The company’s built-to-order model provides higher revenues from premiums (lots, plans, and elevations), and design studio and structural options.

Land Acquisition & Development Approach: KB Home aggressively invests in land acquisition and development programs — especially in high-end locations — that enhance community count and boost the top line, which eventually help it in reducing debt. The company remains optimistic that rising active inventory and reduction in annual interest are expected to boost future gross margin and returns.

The company invested $132 million in new land acquisitions in the fiscal second quarter, followed by $188 million investments in the fiscal first quarter. Also, it has reduced 930 bps debt to capital ratio, to 45.8% in the fiscal second quarter.

Fundamentally Strong Housing Industry: Overall housing market fundamentals remained positive during the first half of fiscal 2019.

Also, the $2.17-billion backlog is expected to drive top-line growth for the remainder of the year. KB Home believes that declining mortgage rates, steady economic growth, high consumer confidence and favorable demographics are likely to continue to provide a healthy backdrop for the housing industry.

Other Key Picks

Other top-ranked stocks in the Construction sector include MasTec, Inc. (MTZ - Free Report) , Great Lakes Dredge & Dock Corporation (GLDD - Free Report) , and Taylor Morrison Home Corporation (TMHC - Free Report) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

MasTec and Taylor Morrison surpassed earnings estimates in all the trailing four quarters, with the average being 11.2% and 38.7%, respectively.

Great Lakes' earnings for the current year are expected to increase 300%.

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