Bear of the Day: KB Home (KBH)

KB Home (KBH) fell short of both earnings and revenue estimates when it reported its fourth quarter fiscal 2022 financial results on January 11. The homebuilder also provided downbeat guidance for 2023 as the housing market continues cool amid a multitude of headwinds outside of KB Home’s control.

KB Home Overview

KB Home is one of the largest homebuilders in the U.S., with it currently operating in nearly 50 markets across the country, mostly in highly desirable areas within Colorado, Arizona, Texas, California, Nevada, Washington, and beyond. The company allows buyers to customize many aspects of their homes.

KBH is also committed to more energy-efficient offerings. In fact, the firm boasts that it is “the first builder to make every home we build ENERGY STAR certified.”

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The Los Angeles-based firm benefitted from the covid housing boom that was driven by ultra-low interest rates, demographic changes, and many other factors that favored KB Home and other home builders.

KB Home’s revenue soared 37% in 2021 and another 21% in 2022. The firm delivered 2% more homes in 2022 (13,738), with its average selling price up 18% to $500K.

The housing market looks a lot different with the average 30-year fixed rate mortgage at around 6.4% at the moment vs. 2.7% in early 2021 and 3.5% in early 2022. KB Home said on January 11 that its ending backlog fell 25% YoY, with Q4 gross orders down 47%. Plus, its cancellation rate as a percentage of gross orders was 68% vs. 13%.

KB Home attributed much of the downturn and “sharply lower demand” on “higher mortgage interest rates, inflation and other macroeconomic and geopolitical concerns.” Zacks estimates call for KBH’s 2023 revenue to fall 25% YoY to $5.2 billion to come in below its FY21 total of $5.7 billion.

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KBH’s adjusted earnings are projected to slide by 49% to $4.67 per share. And its bottom-line outlook could continue to trend in the wrong direction considering that its FY23 Zacks consensus EPS is down 30% in the last few months and around 25% since its Q4 release, with FY24’s figure 35% lower than it was 60 days ago.

Bottom Line

KB Home’s downward EPS revisions help it grab a Zacks Rank #5 (Strong Sell) right now, with its most recent analyst estimate for FY24 coming in 8% worse than the current consensus. On top of that, KB Home’s Building Products - Home Builders industry is in the bottom 8% of over 250 Zacks industries right now.

On the positive side, KB Home shares first began to sell off in May of 2021 and then again in early 2022 as interest rates really began to take off. This means that at least some of the downturn is already priced in.

Unfortunately, the stock rebounded rather significantly off its September lows and it’s now near overbought RSI levels. KB Home’s 1.7% dividend yield can be topped by many other stocks and ETFs with stronger near-term prospects. And the price chart shows us the rather wild ride KBH has been on over the past decade.

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