KB Home (NYSE:KBH) stock just might be a bargain, after all.
KBH stock has been one of the worst-performing homebuilder stocks of the last year, logging a deep 52-week loss even as the rest of the industry has gone on to post market-crushing gains. Whatever optimism investors have reserved for stocks in an improving housing market, it has largely bypassed KB Home stock — at least until now.
Some surprisingly strong quarterly results lit a fire under KB Home stock at week’s end, and given the shares’ long history of underperformance, this could be the beginning of an extended run. The lagging performance has given KBH stock a compelling valuation, and that’s sure to make it attractive to at least some investors.
There’s certainly been no lack of interest in this sector of the market. Housing has been a terrific bet in an otherwise sleepy year for U.S. equities. Just look at the popular SPDR S&P Homebuilders ETF (NYSEARCA:XHB). Heading into Friday, the broader market was up less than 3% for the year-to-date, but XHB was up almost 9%. Over the last year, the S&P 500 gained nearly 8%, versus a 15% gain for XHB.
None of those gains could be credited to KB Home stock, however. It’s been nothing but a drag on performance. Prior to a Friday rally on results, KBH stock was off 10% for the year-to-date and 14% for the last 52 weeks.
But some better-than-expected quarterly results should change sentiment on KB Home stock. Shares jumped a good 6% soon after the opening bell Friday and continued to increase as much as 10%.
If KBH can build on recent success in a much-improved housing market, KB Home stock will remain a buy for a while longer.
KB Home Stock Still Playing Catch-Up
For the most recent quarter, KB Home reported earnings of 10 cents a share. That beat Wall Street’s profit estimate by a solid 2 cents a share, according to a survey by Thomson Reuters. Revenue likewise surprised to the upside, growing to $623 million versus a Street projection of $619 million.
But here’s where it gets interesting for KB Home stock. The overall value of net orders — an indicator of the builder’s future performance – increased 38% year-over-year. Furthermore, KBH’s backlog rose 39% from a year ago, and — most importantly — the average selling price rose 6%.
The forward-looking figures have the market excited about KBH’s ability to take advantage of recent momentum seen in the housing market, where groundbreakings and permits to build new homes have levels not seen in seven and eight years.
And if the market was worried about falling gross margins at KBH, the company’s results and forecast should put its mind at ease. Additionally, interest-rate fears should cool down after this week’s commentary from the Federal Reserve.
At less than 12.5 times forward earnings, KB Home stock trades at discounts to its biggest competitors. If nothing else, KB Home stock should continue to run until its valuation is more in line with the rest of the sector.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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