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

Zacks Equity Research
·4 mins read

KB Home’s KBH focus on the ongoing execution of the returns-focused growth plan, first-time buyers and strong financial position will help the company gain traction amid COVID-19-related woes. Also, revival of the housing market bodes well for the company.

Shares of this Los Angeles, CA-based homebuilder have returned 47.5% in the past three months, outperforming the Zacks Building Products - Home Builders industry’s 46.2% rally. Also, it has outperformed the S&P 500’s 11.6% rise in the said period. The solid performance can be attributed to an impressive earnings surprise trend. KB Home’s earnings surpassed the Zacks Consensus Estimate in 13 of the trailing 14 quarters.

However, renewed fears of a second wave of coronavirus will likely create pressure on homebuilders like KB Home, PulteGroup Inc. PHM, NVR, Inc. NVR, Lennar LEN and others.

Let’s delve deeper into the factors that justify its current Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Growth Drivers

Revival of Housing Industry: The U.S. housing industry has started gaining strength in recent times backed by gradual reopening of the economy, as the pandemic-led restrictions have been easing. The recent market data — indicating solid prospects for the near term — is encouraging, given lower mortgage rates and reduced coronavirus-induced restrictions.

Although an uncertain unemployment rate may negatively impact the demand for housing in the short term, fundamental housing demand remains strong, especially for affordable homes.

Strong Growth Initiatives: KB Home has been pursuing a Returns-Focused Growth Plan since 2016 to drive revenues, homebuilding operating income margin, return on invested capital, return on equity and leverage ratio. The plan’s main components are executing the company’s core business strategy, improving asset efficiency and monetizing significant deferred tax assets.

It has been successfully executing the core business strategy (i.e. KB2020) that aims at boosting scale in the existing geographic footprint, improving profitability per unit, generating higher operating margin and driving earnings, while generating positive cash flow to redeploy for growth and debt reduction.

Strong Balance Sheet Position: KB Home is well positioned to tide over the unfavorable demand trends owing to the pandemic, backed by a strong balance sheet and more than $1.36 billion of liquidity.

The company ended the fiscal second quarter with $575 million cash and cash equivalents, and $787.6 million of available capacity on the $800-million unsecured revolving credit facility. KB Home reduced net debt to capital to 32.4% by fiscal second quarter-end from 35.1% in the first quarter. Notably, KB Home has not borrowed under the facility in 2020.

The company’s 7.00% senior notes of $450.0 million are scheduled to mature on Dec 15, 2021, which indicates that it has no significant debt maturities in the next 12 months.

Impediments

Owing to the coronavirus pandemic, the company has been witnessing slowdown in traffic and sales, which impacted fiscal second-quarter results. It witnessed 57% order decline in the fiscal second quarter, with a 36% decline on a net basis, reflecting cancelations from largely non-started units. KB Home has a relatively high concentration in regions like California, Florida, and Texas that were more affected by the COVID-19 pandemic and job losses. While the worst effect of the pandemic seems to be over, given improved orders in June and the anticipation of persistent margin improvement in the second half of 2020, renewed fears of a second wave of the virus may impact KB Home in the near term.

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PulteGroup, Inc. (PHM) : Free Stock Analysis Report
 
KB Home (KBH) : Free Stock Analysis Report
 
NVR, Inc. (NVR) : Free Stock Analysis Report
 
Lennar Corporation (LEN) : Free Stock Analysis Report
 
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Zacks Investment Research