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Can KB Home Stock Build Back with Q3 Earnings Approaching?

·3 min read

With mortgage rates recently hitting 6%, investors will be scoping KB Home’s KBH third quarter earnings and guidance very closely. KB Home’s Q3 earnings will give an indication as to how one of the more well-known U.S. homebuilders is doing amidst rising inflation and soaring mortgage rates.

KB Home’s guidance will provide insights about demand with mortgage rates at their highest levels since 2008. The housing market as a whole has continued to lag the market, with KB Home and fellow homebuilders such as D.R. Horton, Inc. DHI down big year to date. 

KB Home is renowned for catering to first-time, move-up and active adult homebuyers. Investors will thus get a broader view of how higher mortgage rates and 40-year high inflation are impacting the housing market.

Trading 40% off its highs, investors will be hoping KBH stock can start building back after earnings. CEO Jeffrey Mezger reaffirmed KB Home’s fiscal 2022 guidance last quarter, and said it had a backlog of over $6 billion. It will be important to see if the company was able to stick to this guidance with mortgage rates at 6%.

Performance

KB Home is down -36% YTD to underperform the S&P 500’s at -19%, with a large leg of the decline coming before Q2 earnings were reported in June. We can see in the nearby chart that KBH was able to regain some of its footing after crushing Q2 earnings estimates by 17% and reaffirming its guidance.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Outlook

The Zacks Consensus estimate for KBH’s Q3 earnings is $2.69 a share, which would represent a 64% increase from Q3 2021. Sales for Q3 are also expected to be up 27% at $1.86 billion. It is important to note that estimates revisions over the last 60 days have been slightly down for this year and next year.

Annual earnings for this year are still expected to rise 69% to $10.21 a share, but are expected to slip 4% in FY23. Top line sales growth is projected to be up 29% this year and another 4% in FY23 to $7.69 billion.

Valuation

Currently trading around $28 a share, KBH has a P/E of 2.8X. This is much lower than its high over the last five years of 17.7X and the median of 8.8X.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

KB Home’s P/E also offers a discount to the Contruction Building Services Martket's 6.9X average. Some of the risk appears to be priced into KBH stock, despite the Building Products-Home Builders Industry currently in the bottom 7% out of 251 Zacks Industries.

Bottom Line

KB Home’s third quarter earnings will give valuable insight in regards to the effect inflation is having on the housing market, it currently lands a Zacks Rank #3 (Hold). KBH offers a modest 2.11% annual dividend yield at $0.60 a share. Also, the average Zacks Price Target for KBH offers 45% upside from its current levels.

It will be important to see the guidance KB Home’s offers with mortgage rates at their highest levels since 2008. Wall Street worries that 6% mortgage rates are crippling the home builders market. U.S. existing home sales fell in July for the sixth consecutive month, marking the longest streak of declines in over eight years. Sales of previously owned homes dropped 5.9% in July, with new home sales tumbling 12.6% to the lowest level since 2016.

However, this could be the beginning of a boom-bust cycle that offers significant opportunity to longer term investors. Perhaps an earnings beat and stronger than expected guidance will start building KBH’s stock up again.


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