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Returns-Focused Growth Plan Bodes Well for KB Home (KBH)

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Strong growth initiatives and built-to-order approach bode well for KB Home KBH. In fact, this Los Angeles, CA-based homebuilder recently reported stellar third-quarter fiscal 2018 results, wherein earnings not only surpassed the Zacks Consensus Estimate but also increased considerably on a year-over-year basis. The remarkable performance reflects a solid housing market, regardless of rising interest rate woes. Healthy job market, higher consumer confidence, increasing household formation and demand from millennials are the reasons for strong housing market fundamentals.

A Look at Q3 Results

KB Home came up with solid quarterly results once again on robust housing fundamentals. Earnings surpassed analysts’ expectations by 11.5% in third-quarter fiscal 2018, thereby beating the consensus mark for 11 straight quarters. The company reported 7.1% revenue growth, owing to an 8% increase in deliveries. Earnings grew 71% year over year, aided by solid margins. Its adjusted housing gross profit margin of 23.1% improved 140 basis points (bps).

The company continued to effectively manage overhead cost while increasing scale, which resulted in a record low third-quarter SG&A ratio. Evidently, adjusted homebuilding operating margin surged 190 bps in the quarter.

KB Home’s shares have outperformed its industry so far this year. Earnings estimates have also been trending upward post third-quarter fiscal 2018 results. Estimates have moved 2.4% north for the current year over the past seven days.

KB Home Price


KB Home Price | KB Home Quote

Returns-Focused Growth Plan & Built-to-Order Model as Growth Drivers

KB Home has been pursuing a Returns-Focused Growth Plan since 2016, which is designed to generate revenues and homebuilding operating income margin, return on invested capital, return on equity and leverage ratio. The plan’s main components comprise executing the company’s core business strategy, improving asset efficiency and monetizing significant deferred tax assets. Since 2015, its annual housing revenues on a per community basis have increased 73% to $20.6 million (as of third quarter of fiscal 2018), thereby improving returns.

With the Returns-Focused Growth Plan in place, KB Home continues to invest aggressively in land acquisition and development, mainly in high-end locations, which is critical for community count as well as top-line growth. During the first nine months of 2018, the company invested $1.44 billion in land acquisition and development, up 29% from the corresponding 2017 period. Particularly during the third quarter, total investments increased 44% from the year-earlier quarter to $600.9 million. This investment includes KB Home’s expansion of its Jacksonville, and FL operations, as well as entry into the Seattle, WA market.

In 2017, the company’s return on equity increased 370 bps to 10%, with 2019 target range of 10-15% under the Returns-Focused Growth Plan. In 2018 as well, KB Home intends to continue executing the plan and generating higher cash flow to support growth.

Meanwhile, the company’s built-to-order process provides buyers with a wide range of choices concerning major aspects of their future home along with a personalized customer experience through in-house community teams. This highly consumer-centric approach not only gives KB Home a competitive advantage over peers like Lennar LEN, PulteGroup PHM and D.R. Horton DHI, but also leads to low-cost production. The company follows a strategy of initiating 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.

KB Home remains focused on first-time buyers, which represent the largest demand segment, accounting for approximately 50% of its deliveries over the past five years.

Upbeat Views

All these positives have helped the company to come up with an optimistic view for the remainder of the year. It expects housing gross margin (excluding inventory-related charges) toward the high end of the earlier guided range of 17.6-18%, reflecting an improvement of 110 bps. SG&A ratio will now likely be around 9.8% versus 8.8-9.2% expected earlier. Homebuilding operating margin is now expected at around 8.2%, which represents the high end of the previously projected range of 7.7-8.2%.

Zacks Rank

KB Home currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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