KB Home (KBH) Surges 34.4% YTD: Will the Momentum Continue?

·4 min read

The supply-demand imbalance has been supporting the U.S. homebuilding market, despite challenges comprising rising mortgage rates, supply-chain disruptions, material cost inflation and higher wages. Shares of KB Home KBH have gained 34.4% this year compared with the Zacks Building Products - Home Builders industry’s 25.3% rise.

This Zacks Rank #1 (Strong Buy) stock has a long-term earnings growth rate of 7.1%, which highlights its inherent strength.

The Zacks Consensus Estimate has witnessed an uptrend over the past 30 days as analysts raised their estimates. Over the said time frame, the Zacks Consensus Estimate of $5.27 and $5.87 for 2023 and 2024 has increased 4.2% and 4.8%, respectively.

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What Makes the Stock an Attractive Pick?

Improving Builders’ Sentiment: Builders are now cautiously optimistic for 2023 as a lack of existing inventory is shifting demand to the new home market. Although builders continue to grapple with high construction costs and material supply chain disruptions, they continue to witness strong pent-up demand as buyers wait for interest rates to drop and turn more to the new home market due to a shortage of existing inventory.

Builder confidence in the market for newly-built single-family homes in May inched up five to 50 points, according to the National Association of Home Builders /Wells Fargo Housing Market Index. This marks the fifth straight month that builder confidence has increased and is the first time that sentiment levels have reached the midpoint mark of 50 since July 2022.

KBH believes that it remains well positioned to achieve its full-year revenues expectation supported by an ending backlog value of $3.31 billion, higher community count, and the expectation of current housing market conditions continuing for the rest of the year. The company also expects an improvement in supply chain performance and build times.

Built-to-Order Approach Gives Competitive Advantage: This Los Angeles, CA-based homebuilder's built-to-order process provides buyers with a wide range of choices in the major aspects of their future home and a personalized customer experience through in-house community teams. The company initiates construction only after a purchase agreement has been executed.

This reduces inventory risk, enhances efficiencies in construction and provides greater visibility as well as predictability on future deliveries. The company’s built-to-order homes help it generate higher revenues from premiums (lots, plans, and elevations) as well as a design studio and structural options.

Solid Geographic Footprint: KBH’s existing geographic footprint offers the potential for a substantially larger scale in markets. Although KB Home is perceived to be a California builder, its business is becoming more diversified.

The company’s Southeast region has grown into a larger business, approaching 20% of revenues in the fiscal first quarter compared to only 11% five years ago. This region has significantly improved its profitability and returns in the last five years. Again, during the quarter, KBH achieved its first deliveries in Charlotte, which is a dynamic and growing top-10 housing market.

KB Home has a strong land pipeline and thus expects the fiscal second-quarter end community count to be up 15-20%. For fiscal 2023, the metric is expected to be up in the low-double-digit percentage range.

Other Key Picks

Here are some other top-ranked stocks that investors may consider from the Zacks Construction sector.

Martin Marietta Materials, Inc. MLM currently sports a Zacks Rank #1. MLM delivered a trailing four-quarter earnings surprise of 31%, on average. Shares of the company have gained 14% in the past six months.

The Zacks Consensus Estimate for MLM’s 2023 sales and earnings per share (EPS) indicates growth of 18% and 31.2%, respectively, from the previous year’s reported levels.

Vulcan Materials Company VMC currently flaunts a Zacks Rank #1. VMC has a trailing four-quarter earnings surprise of 7.1%, on average. Shares of the company have gained 10% in the past six months.

The Zacks Consensus Estimate for VMC’s 2023 sales and EPS indicates growth of 5.7% and 25.2%, respectively, from the previous year’s reported levels.

Watsco, Inc. WSO currently sports a Zacks Rank #1. WSO delivered a trailing four-quarter earnings surprise of 5.3%, on average. Shares of the company have gained 23.2% in the past six months.

The Zacks Consensus Estimate for WSO’s 2023 sales and EPS indicates growth of 3.1% and 2.1%, respectively, from the previous year’s reported levels.

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