Shares of KB Home (NYSE:KBH), one of the largest homebuilders in the U.S., have gotten hammered so far in 2015. But relief might be on the way.
Since KBH stock closed at $16.54 on Jan. 12, KB Home investors have seen their positions fall as much as 30% in value, plummeting to an intraday low of $11.76 on Jan. 22. KBH stock has recovered some of those losses, but still is down 17% for the year-to-date.
Not only has KBH grossly underperformed the broader averages, but KBH has been a laggard among the its peers, trailing the 6% gain in the SPDR S&P Homebuilders (ETF) (NYSE:XHB) — home to competing homebuilders like Ryland Group Inc (NYSE:RYL) and D.R. Horton, Inc. (NYSE:DHI).
For the quarter ended February, KB Home is expected to earn 2 cents per share on revenue of $475 million, translating to a decline of 83% year-over-year in earnings on revenue growth of just 5.4%.
In other words, expectations are low — particularly on the earnings side.
But ahead of its fiscal first-quarter earnings results Friday, the prospects for KB Home have improved. And smart investors looking for a strong bounce-back candidate would be wise to buy KBH stock now.
Reasons to Be Optimistic About KBH
While Tuesday’s housing starts report revealed a 17% decline for February, according to the U.S. Census Bureau, it also suggests that home sales will be strong in the months ahead. In the same report, home permits, which offers an outlook for housing starts in the months ahead, beat expectations. The number came in at a rate of 1.092 million, against expectations of 1.058 million, which bodes well for KB Home.
Meanwhile, KB Home itself hasn’t faltered in execution.
In the most recent quarter, the Los Angeles-based company grew revenue 29% year-over-year to $796 million, beating estimates of $778.5 million. Earnings came to $852.8 million, or $8.36 per share … but the company also benefited from a massive income tax benefit of $824.2 million. Backing out this one-time item, earnings of 28 cents per share came in a few pennies shy of the year-ago period’s 31 cents per share, and missed Wall Street projections for 56 cents by a mile. And that helped prompt January’s selloff.
However, it’s also important to remember, KB Home has begun to focus on its most profitable metropolitan areas, and spent portions of its profits to acquire land at rock-bottom prices. At some point, these investments are going to pay off.
What’s more, during the quarter, KBH also benefited not only from higher volumes, but also higher average selling prices.
Investors likely missed this, and makes the stock’s subsequent decline smell like an overreaction. In fact, back in January, Goldman Sachs analyst Eli Hackel noted the benefits of “attractive geographic exposures” — something KBH has.
What Hackel noticed is what KB Home investors should take into consideration. Higher home volumes — when combined with higher average selling prices — translate to higher margins and higher profits. What do you suppose happens next?
That shares of Lennar Corp. (NYSE:LEN) are higher Thursday serves as an example. Lennar just beat Wall Street’s earnings estimates by 5 cents and topped revenue expectations. Even more important, Lennar posted 18% year-over-year jump in new home orders, reaching 5,287 units, translating to $1.8 billion in value.
The total value amount of the new home orders for Lennar increased 24% YOY, which suggests higher average selling prices. But here’s the thing: Lennar’s backlog grew 20%, which also suggests strong pent-up demand — all of which also bodes well for KB Home and KBH stock.
Welcome KBH Into Your Portfolio
Buying KBH stock is not a hard decision, given the combination of higher new home permits, improved lending environment and the results seen from its competitors.
Expect KB Home to beat Wall Street’s targets Friday, and considering the already-battered state of KBH stock, shares should pop in response. Even a jump to early January earnings would be a gain of 15% from here.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
