Should You Buy, Sell, or Hold KB Home Before Q3 Earnings?

KB Home KBH is slated to report third-quarter fiscal 2024 results (ended Aug. 31) on Sept. 24, after the closing bell.

In the last reported quarter, KB Home's earnings and revenues beat the Zacks Consensus Estimate by 20.8% and 4.3%, respectively. On a year-over-year basis, earnings increased 11% on 3.4% lower revenues.

The company's earnings topped analysts' expectations in 31 of the trailing 34 quarters.

How Are Estimates Placed for KBH?

For the quarter to be reported, the Zacks Consensus Estimate for earnings has remained unchanged at $2.04 per share over the past 60 days. The projected figure indicates an increase of 13.3% from the year-ago quarter's earnings of $1.80 per share.

The consensus estimate for revenues is pegged at $1.73 billion, implying growth of 8.8% from the prior-year quarter.

What the Zacks Model Unveils for KB Home

Our proven model predicts an earnings beat for KB Home this time around. This is because a stock needs to have the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.

Earnings ESP: KB Home has an Earnings ESP of +0.08%.

Zacks Rank: KB Home currently has a Zacks Rank #3.

Factors to Shape KBH's Q3 Results

Revenues: KB Home's top line in third-quarter fiscal 2024 is likely to have increased, given higher Housing revenues primarily attributable to growth in deliveries and favorable pricing. The company has been benefiting from the strong buyer demand, particularly for built-to-order homes, despite the volatility in mortgage rates.

The company's focus on personalization and its ability to offer both quick move-in and personalized homes might have helped the company drive growth. KB Home has also been utilizing mortgage buydowns as a key component of its strategy to maintain strong sales amid fluctuating mortgage rates.

Although the company has not provided an explicit forecast for its third-quarter absorption pace, the positive momentum from the fiscal second quarter — driven by strong demand, shorter build times, and strategic pricing — suggests that the absorption pace is expected to remain solid in the fiscal third quarter. The company is focusing on balancing pace and pricing to optimize margins while still driving volume.

The company expects housing revenues in the range of $1.65-$1.75 billion compared with the year-ago figure of $1.57 billion. KBH anticipates the average selling price to be $482,000, indicating an increase from $466,300 reported a year ago.

Our model projects housing revenues to grow 9.1% year over year to $1.72 billion in the quarter. We expect ASP to increase 3.3% to $481,500. We expect total deliveries in the quartet to grow 5.6% year over year.

Margins: Although initiatives like the Returns-Focused Growth Plan and Built-to-Order approach are positives, increasing construction and labor costs are likely to put pressure on the bottom line.

The company anticipates that the housing gross margin for the third quarter of 2024 will decline between 21% and 21.4% (compared with 21.5% in the year-ago quarter). This projection accounts for the concessions provided to homebuyers in the latter half of last year, which were influenced by the challenging market conditions at that time and is expected to close in this quarter.

Selling, general & administrative expenses (SG&A), as a percentage of housing revenues, are likely to be 9.9%-10.3%. We expect SG&A expenses to be 10.2% in the quarter, the same as the year-ago figure.

The company expects adjusted operating margin between 10.8% and 11.4%. Our model predicts the adjusted operating margin to be 10.9% in the quarter, down from 11.4% a year ago.

The company expects an effective tax rate of approximately 24% for the quarter.

Orders & Backlogs: We anticipate that new orders will increase to 3,357 units, up 8.4% from the previous year. With a limited supply of pre-owned homes available, homebuyers are turning their attention to builders who have increased their construction efforts to meet the rising demand. KB Home, along with other homebuilding companies, has benefited significantly from this trend despite ongoing challenges.

We expect the backlog to be 6,062 units, implying a decline from 7,008 units reported in the prior-year quarter.

Meanwhile, our model predicts Financial Services revenues to be $8.3 million for the fiscal third quarter. We expect Financial Services pretax income to be $12.2 million in the quarter compared with the year-ago quarter's figure of $9.9 million.

KB Home's Price Performance & Valuation

KBH's stock has exhibited an upward movement in the past six months. The stock has gained 27.5%, outperforming the Zacks Building Products - Home Builders industry's rise of 16.4% in the same time frame.

The company has also outperformed its peer companies like Meritage Homes Corporation MTH (up 21.6% in the past six months) and Taylor Morrison Home Corporation TMHC (up 16%).

6-Month Price Performance of KBH Stock

Image Source: Zacks Investment Research

Technical indicators suggest continued strong performance for KBH. Notably, the 50-day SMA continues to read higher than the 200-day SMA, signaling the bullish trend.

KBH Stock Trades Above 50 and 200-Day Moving Average

Image Source: Zacks Investment Research

KBH stock is trading at a discount compared with the industry and slightly higher than its median. Despite the company's shares' outperformance compared to its industry, KBH's current valuation is still considered undervalued. This might imply that the market has not yet fully recognized or priced in the company's potential growth prospects or earnings potential. The company is also trading currently at a discount compared to the industry's big shots like PulteGroup, Inc. PHM.

Image Source: Zacks Investment Research

How to Play KB Home Stock?

Investors may want to hold KB Home stock due to its resilience in a challenging housing market, driven by strategic pricing and effective inventory management. Despite industry headwinds like expensive mortgages and slowing demand, KB Home has maintained strong financial performance through a focus on affordability and margin optimization. The company's BTO model has contributed to positive inventory dynamics, supporting confidence in their margin guidance for the second half of 2024.

While the recent Federal Reserve rate cut to 4.75%-5% may provide some market relief, its full impact on homebuilding remains uncertain, as mortgage rates may have already factored in the anticipated cut. Additionally, rising land costs, competition from the resale market, and supply chain disruptions pose challenges to the company's growth potential.

Though KB Home's stock has shown strength with a solid 50-day moving average and discounted valuation, a lack of upward estimate revisions in the past two months signals limited near-term upside. Investors might consider holding the stock while waiting for more favorable market conditions and further clarity on KB Home's long-term performance.

KB Home's operational resilience and strategic focus in a difficult environment make it a stock worth holding, although potential investors may opt for caution until clearer signals of stability emerge in both the company's performance and broader market trends.

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