Although I am bullish on KB Home (KBH) and like the chart on a technical basis, I always like to look at a company’s fundamentals to form an overall opinion of where the trade could be headed. The company doesn’t announce earnings until late September, so we don’t have to worry about this event for another month, but the past can tell us what we might expect in the future.
KB Home reported a better-than-expected quarter in mid-June, as earnings of $0.10 per share topped Wall Street’s expectations by $0.02. Revenue also came in higher at $623 million versus expectations for a reading of $619 million. The top- and bottom-line figures were impressive, but management was confident on the remainder of the year, and I liked what it had to say.
The company’s CEO said that KBH ended the quarter with a significant backlog in all four regions compared to year-ago levels. He also said that this would give the company the visibility it needed to guide deliveries and revenue numbers through year-end.
On that note, KB Home said that housing revenue would come in at $770-$810 million for the current quarter, with full-year guidance of $2.95-$3.1 billion. With other revenue streams and improving margins, earnings are likely to come in higher next month.
To get positioned for it, I recommend the following:
Buy the KBH October 16 calls (KBH151016C00016000) at current levels.
My exit target for the calls is currently $1.05, and I do not have a stop loss in place.
KB Home gained 9% on the earnings beat in June and surged from $14.96 to close at $16.37 that day. Shares have given back much of those gains since despite the solid quarter, which is another reason why I like this trade. If shares clear $15.75, I’m expecting a strong push past $16 to possibly $18. If shares tap $18, these options will be at least $2 “in the money.”
If KBH shares can trade to $17 by mid-October, these options will be $1 “in the money.” This represents another 70% of upside potential if you get into the trade.
Looking at the technicals, support at $15-$14.75 held following yesterday’s backtest to $14.79. Resistance for KB Home is at $15.50-$15.75 and the 50- and 100-day moving averages.
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