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Should Investors Build A Position In KB Home? Analysts Debate Its Foundation After Q3 Report

Jayson Derrick

Homebuilder KB Home (NYSE: KBH) reported third-quarter results Wednesday that weer notable for an earnings beat, strong growth in net orders and deliveries — and a slight sales miss. Here's how the Street reacted. 

The Analysts

KeyBanc Capital Markets analyst Kenneth Zener maintained an Overweight rating on KB Home with a price target lifted from $30 to $36.

Buckingham Research Group analyst Megan McGrath maintained a Buy rating with a price target lifted from $33 to $39.

Bank of America Merrill Lynch analyst John Lovallo II maintained at Neutral with a price target lifted from $33 to $36.

KeyBanc: Orders Above Seasonal Trends

Orders rose by 24% year-over-year in the third quarter on average community count growth of 18%, Zener said in a Wednesday note.

The order pace was down 19% sequentially, but this was better than normal seasonality of a 21% average fall over the past eight years, the analyst said.  

Order seasonality is a "very good predictor" of forward sequential trends, and "we are reticent to deviate from past trends materially," he said. 

Related Link: 'A Clearer Path To Earnings Growth': KB Home's Strong Q2 Triggers Analyst Upgrades

Buckingham: Strong Quarter, Solid Guidance

KB Home reported strong fiscal third quarter results, including an EPS beat and strong order growth of 24%, McGrath said in a Thursday note.

In fact, orders rose by a double-digit rate in each region, with notable strength seen in the Southwest and West markets, the analyst said. 

View more earnings on KBH

KB Home indicated that market conditions remain favorable, supporting a price increase across 90% of its communities in the quarter, she said.

Margins rose 20 basis points year-over-year to 18.9%, while SG&A at 11.1% of sales were better than the 11.5% expected.

Looking forward, KB Home expects to see continued community count growth in fiscal 2020 and guided to revenue of $4.9 billion to $5.3 billion, or higher by 11.5% versus 2018 at the midpoint, according to Buckingham.

Specific margin guidance wasn't offered, but the homebuilder said it should benefit from lower interest expense, fewer reactivated communities and closings from newer communities.

BofA: Q4 Outlook 'Attainable'

KB Home also guided to fourth-quarter  housing revenue of $1.56 billion to $1.64 billion, an average delivery price of $400,000 to $410,000, a homebuilding operating margin of 9.9% to 10.5% and average community count growth of 10%, Lovallo said in a Wednesday note. These metrics are both "encouraging and achievable," the analyst said. 

Despite an encouraging outlook, there are other homebuilder stocks that offer investors the potential for higher upside, Lovallo said.

Investors may want to remain on the sidelines, as KB Home's momentum is consistent with the broader industry, according to BofA. 

Related Link: KB Homes Analysts React To Q1 Earnings Beat, Revenue Miss, Note Interest Rate Effect

Latest Ratings for KBH

Date Firm Action From To
Sep 2019 Maintains Market Outperform
Sep 2019 Maintains Buy
Sep 2019 Maintains Outperform

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