Shares of one of the largest homebuilders in the United States, KB Home KBH have rallied nearly 72% so far this year, beating its industry’s gain of 40.7%. Also, the company has outperformed the industry in each of the 4-week, 12-week and 52-week time frames, giving the stock a Momentum Score of A.
The company’s consistent bottom-line outperformance on the back of a healthy housing industry and strong demand trends has lent the stock some momentum. KB Home surpassed earnings estimates consistently for the past seven quarters.
Recently, KB Home came up with stellar fiscal third-quarter results wherein earnings and sales surpassed analysts’ expectations by 8.5% and 2.1%, respectively. The company reported impressive 25.3% growth in revenues on an 11% increase in deliveries. Earnings in the quarter grew 21.4% year over year, buoyed by solid margins. Notably, shares rallied over 12% post the release of Q3 earnings.
Also, earnings estimates have risen over the past few weeks, suggesting that sentiments on KB Home are moving in the right direction. Over the last 30 days, the Zacks Consensus Estimate for fiscal 2017 earnings rose 1.4% to 75 cents per share. Also, earnings estimates for fiscal 2018 have inched up 4.4% in the same time frame.
This positive trend signifies bullish analyst sentiments and the company’s Zacks Rank #2 (Buy) indicates robust fundamentals and expectations of outperformance in the near term.
Let us delve deeper into the other factors which make this stock a lucrative pick.
Solid Growth Prospects
KB Home makes a great pick in terms of growth investment with a Growth Score of B on our style score system that helps us identify potential outperformers. Arguably, nothing is more important than earnings growth as surging profit levels are often an indication of strong prospects.
KB Home is focused on its core KB2020 business strategy which aims to boost scale in existing geographic footprint, improve profitability per unit, generate higher operating margin and drive earnings while generating positive cash flow to redeploy for growth and debt reduction.
Earnings in fiscal 2017 are expected to grow 55.5%, way higher than the industry’s projected EPS growth of 18.3%. Additionally, the company’s sales growth in 2017 is projected at around 19.7% compared to the industry’s 7.9%.
KB Home expects the uptrend to continue in the rest of fiscal 2017 and fiscal 2018 as well. Homebuilding revenues are likely to come in at $4.3 billion in 2017, reflecting 20% growth from the 2016 level. In fiscal 2018, KBH expects revenues in the $4.5 billion to $4.9 billion range.
Moreover, the overall outlook for the U.S housing industry is positive on healthy economy, strong job market and historically low mortgage rates in spite of weak housing data recorded in the last two months as inventory shortage has started affecting sales. The Zacks Homebuilding industry currently ranks among the top 21%, showing that companies in this space are poised to benefit from favorable broader factors in the immediate future.
Valuation Looks Rational
KB Home has a Value Style Score of A, putting it into the top 20% of all stocks we cover from this perspective.
We find the price-to-book ratio as the best multiple for valuing homebuilders because of their asset-driven nature. KB Home currently has a trailing 12 month P/B ratio of 1.3, which is fairly below the highs scaled by this stock over the past five years. This indicates that the stock is undervalued compared to its historical levels.
Looking at the company’s sales, the company currently trades at a Price-to-sales (P/S) ratio of 0.7, lower than the industry average of 1.1. Some prefer this metric over other value-focused ones because sales are harder to manipulate with accounting tricks than earnings.
KB Home has a VGM Score of A. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 make solid investment choices.
Other Stocks to Consider
A few other top-ranked stocks in the same space are Beazer Homes USA, Inc. BZH, Persimmon Plc PSMMY and Toll Brothers Inc. TOL.
Beazer Homes sports a Zacks Rank #1 (Strong Buy) and is likely to witness a rise of 60.6% in earnings for the current quarter.
Persimmon, also a Zacks Rank #1 stock, is expected to witness 18.3% growth in earnings this year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Toll Brothers, a Zacks Rank #2 stock, is expected to witness 46% growth in fiscal 2017 earnings.
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