Mortgage Rate Volatility Still Clouds KB Home's Outlook, Says Analyst

Raymond James analyst Buck Horne reiterated the Market Perform rating on the shares of KB Home KBH.
The company reported 4Q22 EPS of $2.47 (+29% y/y), missing the analyst's $2.78 estimate and the consensus.
Key variances relative to the analyst's model included a $34 million shortfall in homebuilding revenue due to lower deliveries, a 140 basis points miss on gross margin partially offset by $0.14/share upside from lower SG&A expenses.
Build times improved by 21 days on the front half of the construction process, but timelines continued to expand by 7 days on the back half, said the analyst.
The delays on the back half combined with a larger cancellation rate and challenges with utility companies were responsible for the miss on deliveries by about 190 homes, added the analyst.
To protect its backlog, KBH predominantly used incentives rather than implementing price reductions to drive net sales in Q4, remarked the analyst.
However, as 1Q23 progresses, the analyst said more communities might see price reductions going forward.
Though mortgage rates are off their recent peaks, KBH targets a decline in orders between 50% – 60% in 1Q23.
The analyst remains cautious near-term as mortgage rate volatility since the January jobs report has highlighted how tenuous the affordability situation remains for homebuilders.
KBH remains more highly exposed to certain markets with elevated y/y levels of new home inventory growth to start in 2023, opined the analyst.
The analyst is encouraged by KBH's willingness to pivot its near-term operating strategy by maintaining an elevated level of spec home production, recognizing that many buyers need closing certainty and rate locks over personalizations in this environment.
The analyst also recognizes that large portions of KBH's remaining backlog could still be prone to elevated cancellations if the pricing environment becomes increasingly competitive this spring.
Also Read: KB Home's Q4 And Fed Connection: Cramer Says Jerome Powell Has to Be Happy With The Numbers
Price Action: KBH shares are trading lower by 2.83% at $34.65 on the last check Tuesday.

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