KB Homes Downgraded On Valuation Risk After 'Ballistic' Growth

KB Home KBH was downgraded by Buckingham Research Group Friday, with an analyst saying the homebuilder's share price "is ahead of itself." 

The Analyst

Buckingham's Mark Weintraub downgraded KB Home from Neutral to Underperform and raised the price target from $28 to $34. 

The Thesis

KB Home, a Los Angeles-based homebuilder, has experienced strong growth in the last year, with revenue up 21.45 percent and gross profit up 30.72 percent year-over-year in 2017 and EPS figures exceeding analyst estimates.

A key growth driver has been recovery in the U.S. housing market, which has led to stronger consumer demand and caused the volume of deliveries to land in the upper end of guidance estimates, Weintraub said. (See the analyst's track record here.) 

Despite strong sales growth, Buckingham lowered its rating on concerns of sustainability, the analyst said. KB's share price is up 170 percent in the past year, a rate Weintraub describes as "ballistic." 

KB Homes will need to greatly increase spending in order to sustain the high growth rate, the analyst said. 

The company's growth will also largely depend on housing market performance in 2018, which may not reach 2017 levels, Weintraub said. 

Short covering has played a role in “exacerbating the share price action” for KB Homes, Weintraub said, adding that shares are trading at a premium that far outpaces peer group averages.

Price Action

At the time of publication, KB Home shares were trading up 0.72 percent at $63.83. 

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