4 Factors That Underscore KB Home's (KBH) Solid Prospects

Shares of KB Home KBH — one of the largest homebuilders in the United States — have rallied nearly 41.4% in the past year, beating its industry’s gain of 22.5%. Also, the company has outperformed the industry in the 52-week time frame, giving the stock a Momentum Score of B.

The company’s consistent bottom-line outperformance on the back of a healthy housing industry and strong demand trends has lent the stock some momentum. KB Home surpassed earnings estimates consistently for the past nine quarters.

Recently, KB Home came up with stellar first-quarter fiscal 2018 results once again on solid housing fundamentals. Earnings surpassed the Zacks Consensus Estimate by 33.3% and surged 116.7% from the year-ago quarter’s figure. Though revenues missed the consensus mark, it increased 6% year over year, driven by higher housing revenues. Adjusted housing gross profit margin improved 150 basis points (bps). This was primarily attributed to 7% rise in average selling price. Moreover, SG&A expenses declined 50 bps from the year-ago quarter, marking a record low first-quarter ratio in the company's history.

Meanwhile, earnings estimates have risen over the past few weeks, suggesting that sentiments on KB Home are moving in the right direction. Over the last 60 days, the Zacks Consensus Estimate for fiscal 2018 earnings rose 4% to $2.62 per share. Also, earnings estimates for fiscal 2019 have inched up 4.4% in the same time frame.

This positive trend signifies bullish analysts’ sentiments, and the company’s Zacks Rank #1 (Strong Buy) indicates robust fundamentals and expectations of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s delve deeper into other factors that make this stock a lucrative pick.

What Makes KB Home a Solid Bet?

Built-to-Order Approach Lends a Competitive Advantage: The company’s Built-to-Order homebuying process provides KB Home homebuyers with a wide range of choices, together with personalized customer experience. In order to drive profit per unit, construction is initiated only after a purchase agreement has been executed and obtained preliminary credit approval or other evidence of the homebuyer’s financial ability to purchase the home. This consumer-centric approach gives KB Home a competitive advantage, reduces its inventory risk and enhances efficiencies in the construction process.

Solid Returns-Focused Growth Plan to Drive Profits: 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. In 2017, the company’s return on equity increased 370 bps to 10%, with the 2019 target range of 10-15% under the Returns-Focused Growth Plan. In 2018 as well, KB Home intends to continue executing the plan and generating higher cash flow to support growth.

Moreover, the company believes that in 2019, it will be able to rake in housing revenues of more than $5 billion, homebuilding operating income margin of 8-9%, housing gross profit margin of 17.5-18.2%, selling, general and administrative expense ratio of 9-9.5%, return on invested capital in excess of 10%, and net debt-to-capital ratio of 40-50% on the Returns-Focused Growth Plan.

Also, the company displays three to five year expected EPS growth rate of 16%, reinstating investors’ confidence in the stock.

Upbeat Outlook: KB Home narrowed its fiscal 2018 revenue guidance range to $4.55-$4.85 billion from $4.5-$4.9 billion, average selling price or ASP to $400K-$410K from $395K-$405K and margin guidance of 17.4-17.9%, whereas raised its operating margin guidance to 7.4-8% from 7.2-7.7%.

The company’s fiscal 2018 revenue guidance of up approximately 10% on flat year-over-year community counts affirms that revenue gains came along with improvements in both gross margins and general and administrative lines, accompanied with positive regional mix.

The company’s fiscal 2018 earnings are expected to grow 41.6%. The above-mentioned tailwinds have made it a great pick in terms of Growth investment. The stock has a Growth Score of A.

Valuation Looks Rational: KB Home has a Value Style Score of A, putting it in the top 20% of all the stocks we cover from this perspective.

We find the price-to-book ratio as the best multiple for valuing construction companies because of their asset-driven nature. KB Home has a trailing 12-month P/B ratio of 1.3, comparing favorably with the industry’s P/B ratio of 1.9. Hence, its lower-than-market positioning hints at more upside in the quarters ahead.

Meanwhile, the company has a trailing 12-month Price-to-Earnings or P/E ratio of 13.5. This is quite cheap compared with the industry as well as the market at large, as the current P/E for the industry and S&P 500 is at 14.5 and 20.6, respectively.

Again, the company’s trailing 12-month Price-to-Sales or P/S ratio of 0.6 is lower than the industry’s 1x as well as S&P 500’s 3.3x.

Bottom Line

The homebuilding industry remains positive with a healthy economy and strong job market that will continue to drive stocks higher. KB Home is one such stock that continues to show strength in several areas on the back of Built-to-Order approach, solid growth plan and healthy growth prospects. Adding the stock to your portfolio should not be a disappointment.

Other Stocks to Consider

Other top-ranked stocks in the same space are Meritage Homes Corporation MTH, Lyon William Homes WLH and Beazer Homes USA, Inc. BZH, each carrying a Zacks Rank #2 (Buy).

Meritage Homes and Lyon William are expected to witness 30.4% and 38% increase in 2018 earnings.

Beazer Homes is expected to witness 112.5% growth in earnings this quarter.

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KB Home (KBH) : Free Stock Analysis Report
 
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Lyon William Homes (WLH) : Free Stock Analysis Report
 
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