Home builders are very cheap right now, historically speaking. However, for investors in KB Home (NYSE:KBH) stock, this market environment has been a difficult one to stomach.
That’s because earnings revisions are getting hammered in the home building sector. Rapidly rising mortgage rates, thanks to Federal Reserve rate hikes and quantitative tightening, are hitting expectations of future demand for new homes. This has been reflected in KBH stock, which is down approximately 35% this year alone.
However, after reporting strong Q2 earnings today, KBH stock has rebounded. At the time of writing, it has surged more than 7%.
The company reported both earnings and revenue that beat consensus estimates by a rather significant margin. Additionally, with a backlog of more than $6 billion in unbuilt homes, there’s a lot to like about the company’s future prospects.
KB Home brought in adjusted earnings per share of $2.32, well in excess of analyst estimates of $1.97. Revenues came in at $1.72 billion, ahead of estimates for $1.61 billion. Furthermore, homebuilding margins remained very strong, actually increasing 390 basis points on a year-over-year basis, to 25.3%.
Overall, these numbers were solid. However, there are other reasons why investors were excited about these results. Let’s dive into why KB Homes is flying today.
Why Is KBH Stock Soaring Today?
Earnings reports are inherently backward-looking. While historical data is fine, what investors are really concerned about, particularly with home builders, is these companies’ future forecasts for growth and margins. On this front, there’s a lot to like about these numbers as well.
KB Home suggested to investors that its backlog, as well as its business model, should provide sustainable growth over time. In particular, the company’s built-to-order business model is something KB Home believes can enable the company to navigate what could be choppy waters on the horizon.
Indeed, no one really knows how bad this incoming recession will be, if it indeed materializes. New home construction will likely slow, due to where mortgage rates are right now. However, if KB Home is able to maintain these margins, in the face of rising costs, there’s a lot to like about the value this company provides.
Indeed, at a price-to-earnings multiple of only 4.4 times (after today’s rise), KBH stock is cheap. Many investors aren’t missing out on the opportunity to pick up shares on this weakness. I can’t blame them.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
