Bull of the Day: KB Home (KBH)

KB Home (KBH) stock is in the midst of a stellar year-plus run and the firm topped fourth quarter earnings estimates in early January. The home builder also looks poised to benefit from renewed life in the U.S. housing market and its 2020 outlook supports the recent statistics.

KB Home’s Pitch

KB Home operates in 42 markets in eight different states, mostly in highly desirable areas from Colorado and Arizona to California and Washington. The firm allows home buyers to customize their homes. They can choose their lots and floor plans, as well as interiors, which includes everything from countertops to cabinets. The Los Angeles-based firm has also rolled out more energy-efficient homes recently.

KB Home posted stronger-than-projected Q4 earnings results on January 9 and saw its sales climb. The firm’s home deliveries popped 16% to just under 4,000, with an average selling price of $392,500. Plus, its backlog value jumped 26% to $1.8 billion.

For fiscal 2019, KBH’s deliveries climbed 5% to nearly 12,000 with an average price of $380,000. “Our net orders advanced 38% year over year, reflecting strong demand for our built-to-order product at affordable price points, together with limited inventory in our served markets,” CEO Jeffrey Mezger said in prepared Q4 remarks.

 

 

 

 

 

 

Along with KB Home’s strong individual performance, the U.S. housing market is flashing signs of strength. Housing starts hit a 13-year high in December 2019. The National Association of Home Builders also said that home-builder sentiment was higher than it has been during any month since 1999.

On top of that, 30-year fixed mortgage rates rest at around 3.5% at the moment, down from around 4.2% in the year-ago period. These favorable rates, coupled with positive housing industry sentiment, low U.S. unemployment, and continued U.S. GDP growth in 2020, could set up KBH for another solid year in 2020.

Other Fundamentals

Shares of KB Home have soared 78% in the last 12 months to crush its industry’s 33% climb and S&P 500’s 20% expansion. Investors will also see in the nearby chart that KBH’s current run began in mid-November 2018, with the stock up 115% since then.

Despite outpacing its industry, KBH still trades at a discount against the Construction-Building Services Market’s average forward 12-month earnings estimates (10.4X vs. 12.5X). Plus, KB Home is trading far below its own three-year high of 16.8X, even though its stock price has soared.

KB Home currently sports a “B” grade for Value and an “A” for Growth in our Style Scores system to help it earn an overall “B” VGM score. The firm is also part of any industry that rests in the top 7% of our more than 250 Zacks industries.

Plus, KBH’s annualized dividend of $0.36 per share currently yields 0.94%. This is hardly a great payout compared to the 10-year U.S. Treasury’s 1.57%, but it roughly matches fellow industry peer PulteGroup, Inc. (PHM).

 

 

 

 

Outlook

Our Zacks estimates call for KB Home’s first quarter 2020 sales jump to 17%, which would top Q4’s 16% top-line expansion. Looking ahead, the company’s fiscal 2020 sales are projected to climb 14.5% to $5.21 billion, with 2021 expected to come in 7% higher at $5.58 billion. These would both easily top 2019’s flat growth and 2018’s 4.1% expansion.

At the bottom end of the income statement, its adjusted quarterly earnings are projected to soar roughly 42% and 45%, in Q1 and Q2, respectively.

In terms of fiscal 2020, KB Home’s EPS figure is projected to pop 29%, which would come on top of 2019’s roughly 67% bottom-line expansion. And in a sign of continued momentum, KBH’s fiscal 2021 earnings are projected to pop another 9.3% higher to reach $4.02 per share.

 

 

 

 

Bottom Line

KB Home’s fiscal 2020 and 2021 earnings estimates have climbed completely upward since it reported its Q4 results. This helps KBH stock earn a Zacks Rank #1 (Strong Buy) right now.

The new strong housing numbers could also suggest that millennials are finally starting to buy homes. And investors might want to check out some of KB Home’s peers in this hot industry, which includes fellow #1 (Strong Buy)-ranked M/I Homes, Inc. (MHO), NVR, Inc. (NVR), along with #2 (Buy)-ranked Meritage Homes Corporation (MTH) and others.

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