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 ReadKB 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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