KB Home (KBH) popped nearly 6% at the open after reporting a strong quarter and upbeat outlook last night, but that doesn’t really ease fears of any incipient weakness in housing market.
Shares in KB Home have been a bright spot among homebuilders this year, so it’s not like you can count them to be a bellwether. The wider sector has actually been something of a disappointment. The iShares Dow Jones US Home Const. (ETF) (ITB) is down 3.5% for the year-to-date. That lags the S&P 500 by about 3 percentage points.
KBH, however, is up roughly 12% so far this year, and the company’s outlook should keep that momentum intact even as uncertainty creeps into the sector.
New home sales rebounded in February, the Commerce Department said Thursday, but gains were concentrated in one area. On a seasonally adjusted basis, new-home sales rose 2% to a rate of 512,000, but all of the increase came from a surge in the West.
Meanwhile, according to the National Association of Realtors earlier this week, existing home sales fell 7.1% last month to a seasonally-adjusted annual rate of 5.08 million.
The bottom line is that tight supply of houses is raising prices and weighing on sales for the housing market at large.
KB Home, with heavy exposure to the West, has been a beneficiary. The homebuilder’s average selling price rose 5% in the quarter.
KBH’s Impressive Quarter
KB Home’s healthy backlog drove a 68% jump in fiscal Q1 profit, which easily surpassed Wall Street estimates.
For the three months ended Feb. 29, KBH said earnings rose to $13.1 million, or 14 cents a share, compared to $7.8 million, or 8 cents a share, last year. Analysts were looking for earnings of 11 cents a share, according to a poll by Fact Set. A 17% rise in revenue to $678.4 million beat the Street view for $632.9 million.
As always, the outlook was the most important piece of the earnings report, and it augured continued strength.
Backlog value at the end of the quarter rose 29% to $1.43 billion and homes in backlog increased 22%. Net order value gained 9%, while net orders grew 4%. Furthermore, cancellation rate improved to 21% from 25%.
That’s all very promising, but beware that KBH stock’s outstanding performance on the news — and for the YTD — is also being driven by a short squeeze. True, a number of shorts have been driven out of the stock over the course of the month, but the percentage of outstanding shares sold short is still nearly 25%, according to S&P Capital IQ. That will give any stock extra juice.
So is KBH stock a buy at current levels? Probably not.
The outlook is certainly improved but investors view the entire housing market with a wary eye. Much of the gains can be attributed to shorts getting pantsed. Wall Street overwhelmingly calls KBH a hold, and now that shares are above analysts’ average price target, we could see downgrades on valuation.
There’s definitely some things to like in KB Home’s improving fundamentals, but the timing of committing fresh capital could be a lot better.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
