KB Home (KBH), a leading homebuilding company that builds and sells various homes, is set to report its financial results for the third quarter, which ended August 31, 2024, after the market close on September 24, 2024. Street expects the company’s revenue and EPS for the third quarter to grow 8.9% and 15% year-over-year to $1.73 billion and $2.07, respectively.

During the last reported quarter, KBH’s net orders increased by 2% to 3,997, and the net order value grew by 7% to $2.03 billion. Further, its monthly net orders per community increased to 5.5 from 5.2. Also, the company expects its ending community count in the range of 250 to 255 over the full year 2024.

KB Home offers affordable housing facilities and focuses on providing personalized, spacious, new homes and family-friendly amenities. During the second quarter, KBH opened multiple new communities to cater to the diverse demands of its customers. These communities include Rhythm, Farmlore Villas, Overlook Ranch, Catania at Citrine, and Enclave.

Further, amid interest rate cuts, coupled with slowing inflation, more and more individuals are interested in purchasing houses, resulting in strong growth for the homebuilding industry. The US residential construction market is expected to grow at a CAGR of 3%, driven by affordable housing trends.

Regarding the second quarter results, Jerey Mezger, Chairman and Chief Executive Officer of the company, commented, “Buyers remained resilient in their desire for homeownership despite the volatility in mortgage interest rates.”

He added, “Our pace of monthly net orders per community was one of our highest second quarter levels in many years, which we believe reflected the compelling, personalized choice that our Built to Order model offers to meet each buyer’s lifestyle and budget.”

Shares of KBH have gained 29.4% over the past six months and 79.6% over the past year to close its last trading session at $86.75.

Let’s look at factors that could influence KBH’s performance in the upcoming months.

Mixed Financials

For the second quarter that ended May 31, 2024, KBH’s total revenues decreased 3.1% year-over-year to $1.71 billion. Also, its operating income declined 6.9% from the year-ago value to $188.18 million. Its total pretax income of $221.12 million reflects growth of 2.9% from the prior-year quarter.

Furthermore, the company’s net income and EPS came in at $168.42 million and $2.15, indicating increases of 2.4% and 10.8% from the prior year’s quarter, respectively. As of May 31, 2024, KBH’s total assets stood at $6.81 billion, compared to $6.65 billion as of November 30, 2023.

According to the company’s guidance for the full year 2024, KBH expects its housing revenues to range from $6.70 billion to $6.90 billion. Its average selling price is expected to be between $485,000 and $495,000. Also, the company expects homebuilding operating income as a percentage of revenues between 11% and 11.4%.

Solid Historical Growth

KBH’s revenue grew at a CAGR of 10.5% over the past three years, while its EBITDA improved at a CAGR of 11.9%. Its EBIT increased at a CAGR of 12% over the same period, while the company’s net income and EPS grew at respective CAGRs of 12.6% and 19.2% over the same time frame.

Further, the company’s tangible book value and total assets have increased at a CAGR of 11.4% and 6.6% over the past three years, respectively.

Favorable Analyst Estimates

Analysts expect KBH’s revenue for the third quarter (ending August 2024) to come in at $1.73 billion, indicating an increase of 8.9% year-over-year. The consensus EPS estimate of $2.07 for the same period reflects a 15% year-over-year improvement. Moreover, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.

For the fiscal year (ending November 2024), the company’s revenue and EPS are anticipated to grow 6.5% and 19.7% year-over-year to $6.83 billion and $8.41, respectively. In addition, Street expects its revenue and EPS for the fiscal year 2025 to grow 4.8% and 6.7% from the prior year to $7.16 billion and $8.97, respectively.

Mixed Profitability

KBH’s trailing-12-month EBIT margin of 11.76% is 50.7% higher than the 7.81% industry average. However, its trailing-12-month gross profit margin of 21.89% is 41.1% lower than the industry average of 37.19%. And the stock’s trailing-12-month levered FCF margin of 4.94% is lower than the industry average of 5.25%.

Furthermore, the stock’s ROCE, ROTC, and ROTA of 15.54%, 8.46%, and 8.92% are favorable compared to the 11.32%, 6.08%, and 4.12% industry average, respectively.

Lower Valuation

In terms of forward non-GAAP P/E, KBH is currently trading at 10.31x, 37.2% lower than the industry average of 16.41x. Also, the stock’s forward EV/Sales and Price/Sales of 1.11x and 0.96x are considerably lower than the industry average of 1.25x and 0.92x, respectively.

Additionally, the stock’s forward EV/EBITDA and Price/Book of 7.70x and 1.57x are 22.8% and 38.2% lower than the industry averages of 9.98x and 2.54x, respectively.

POWR Ratings Reflect Uncertainty

KBH’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, translating to a Neutral in our proprietary system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. KBH has a B grade for Value, justified by its lower-than-industry valuation.

However, the stock has a C grade for Growth, in sync with its mixed performance in the last reported quarter. It also has a D grade for Stability, consistent with its 5-year beta of 1.81.

KBH is ranked #15 among the 23 stocks in the Homebuilders industry.

Beyond what I have stated above, we have also given KBH grades for Sentiment, Momentum, and Quality. Get access to all the KBH ratings here.

Bottom Line

KBH is set to report its third quarter earnings during late September. The company’s long-term prospects appear promising, driven by its expanding product offerings, strategic investments, and solid order growth.

Despite solid historical growth and lower valuation, KB Home grapples with declining revenue and operating income.

Given KBH’s mixed financial results and profitability, waiting for a better entry point in this stock seems prudent.

Stocks to Consider Instead of KB Home (KBH)

Given its near-term uncertain prospects, the odds of KBH outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these A (Strong Buy) or B (Buy) stocks from the Homebuilders industry instead:

M/I Homes, Inc. (MHO)

NVR Inc. (NVR)

PulteGroup Inc. (PHM)

For exploring more A and B-rated homebuilders stocks, click here.

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KBH shares were trading at $86.82 per share on Wednesday afternoon, up $0.07 (+0.08%). Year-to-date, KBH has gained 40.43%, versus a 19.28% rise in the benchmark S&P 500 index during the same period.

About the Author: Rjkumari Saxena

Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions. More...

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