Key points
- KB Home reported a solid quarter and raised forecasts after backlogs showed sequential growth.
- Cash flow and capital returns are strong, improving shareholder value over the trailing twelve months.
- Analysts are raising their targets following the report, which could send the stock to a new high.
- 5 titles we like most from KB Home
KB Home New York Stock Exchange: KBH the stock price may rise in 2024 despite difficulties with traction after the first quarter release. The company is firing on all cylinders and generating value for shareholders with no sign of stopping.
If anything, the F2024 guidance is weak because there is a change in the wind. The FOMC is on track to start cutting rates this year, putting the economy and the housing market on the path to acceleration. The timing of the first cut is questionable, and the pace may be slower than currently indicated, but that doesn’t matter; rates have peaked and now have nowhere to go but down. This and pent-up demand in the housing market will keep homebuilders busy for years.
KB Home’s cash flow generates value for investors
KB Home had a decent quarter, with growth accelerating to 6.5% from 6.0% in the previous quarter. Revenue of $1.47 billion was 70 basis points better than forecast, with a 9% increase in deliveries offset by a 2.7% decline in average selling price. More significantly, the company maintained margin despite deleveraging home prices and delivered better-than-expected results. Helped by share repurchases, net income increased 10% and diluted GAAP earnings 21%.
Internal parameters and guidelines are favorable. The company’s net new orders increased 55%, resulting in a 5% sequential increase in order backlog. The value of new orders also exceeded volume growth by 300 basis points, demonstrating some influence on the results. The only bad news is that, despite an increase from previous guidance, forecast annual revenue of $6.5 billion to $6.9 billion is in line with consensus. It’s not a catalyst for a rally, but it doesn’t provide a reason to sell either.
KB Home builds more than just homes: shareholder value
The driving force for share price increases in KBH stock and other homebuilders is cash flow, balance sheet, capital returns and increased shareholder value. KB Home’s cash flow was sufficient in 2023 to maintain a strong balance sheet by investing in growth, repurchasing shares and paying dividends. The dividend is lower than average, yielding 1.15%, but safe and compounded by share buybacks. Share buybacks reduced the number of shares by 9% year over year at the end of the first quarter and are expected to continue steadily through the end of the year.
The balance sheet is in excellent shape. The cash position is slightly decreasing but offset by the increase in inventories and investments. Assets are increasing and liabilities are decreasing, resulting in increased share capital despite massive share buybacks. Equity increased by 1.8% and book value by 14% and both are expected to improve sequentially over the course of the year.
Analysts guide the KB Home share price higher
The analyst consensus target is up 60% year-over-year and rising after the first-quarter release. The price target lags the market, but is made up for by the range of recent targets, which are well above it. Marketbeat tracks half a dozen post-release revisions, and only one includes a downward revision to the $78 price target, the highest target revision offered thus far.
The other revisions include targets ranging from $64 to $69, which is the hurdle. The $69 target is in line with current action and could provide a ceiling for the market. If this happens, the KBH could narrow or correct to lower levels before rising later in the year.
The technical action is mixed. The stock is in an uptrend but shows resistance at $70, which could limit gains. The market hit a new high after the Q1 release, but sold off during the session, creating divergences in indicators that could lead to lower prices. Critical support is at the 30-day moving average. It could sell off at lower lows if the market drops below that level. The next target for solid support would be $64, and the market could move even lower. If support at the 30-day EMA is held, KBH shares could reach a new high before the summer.
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