Raymond James Steps To The Sidelines On KB Home After 25% Run

Shares of homebuilder KB Home KBH are up around 25 percent since the start of 2019 and investors may want to consider taking a "step back," according to Raymond James.

The Analyst

Raymond James' Buck Horne downgraded KB Home from Outperform to Market Perform with no assigned price target (prior price target of $25).

The Thesis

The housing market is showing no signs of trouble based on encouraging January commentary while early February data shows week-to-week seasonal improvements, Horne said in a note. The data also points to industry wide year-over-year order comps being negative for the first quarter 2019, although less negative than what was seen in the fourth quarter of 2018 due to lower mortgage rates, incentive packages and thawing weather conditions.

Horne said KB Home's management increased its cash land spend by 25 percent in 2018 to $1.9 billion with an acceleration seen in the back half of 2018. This should position the company to gain market share in 2019 due to the average community count which should be up by a double-digit for most of the year.

After recent gains, KB Home's stock is now trading at around 1.4 times estimated adjusted book value. It also implies a modest but fair single-digit discount to its peers given multiple areas of concern, including: higher leverage and outsized exposure in California that creates a "wider uncertainty of outcomes."

Price Action

Shares of KB Home were trading lower by 2 percent at $23.38 Monday afternoon.

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