The Bottom Is In For KB Home
We highlighted KB Home (NYSE: KBH) earlier this year when it became apparent the institutions had put a bottom in the stock. While the market for KB Home has since moved down to a new low, the institutional support remains high and suggests a rebound is in the works. The caveat for investors is that a bottom does not mean a reversal and price action may be capped later in the year.
The company reported a solid increase in sales, and wider margins, and is forecasting more of the same but the details leave something to be desired. The gains in revenue, margin, and earnings are due to a single factor, price increases, that is ultimately hurting the pace of business. In this scenario, the company can be expected to produce solid results for the foreseeable future but we aren’t expecting growth, not real growth, which is bad news in the eyes of the market.
In regard to the institutions and their support, the sell-side has been net-buying for the last 9 consecutive quarters and picked up nearly 8% of the market cap over the last four quarters based on a $29.65 closing price. This has their total holdings up to nearly 90% and growing despite some evidence of rotation within the group. The takeaway is that, rotation or not, the institutions still see upside in the name and should help support the price action in the near to short-term. Insider activity is telling as well, the insiders were shedding shares last year but they stopped in Q3 of 2021 and haven’t turned one loose since.
The Analysts Adjust KB Home Targets After Q2 EPS
KB Home had a good quarter in regard to business, revenue, and earnings and it resulted in some changes to the analyst’s estimates. The company reported $1.72 billion in consolidated revenue for a gain of 19.4% over last year. The revenue also beat the consensus by 366 basis points as well, but this is where the good news starts to sour. The gain in revenue is due 100% to a 21% increase in average selling price offset by a small decline in volume. The increase in selling price also resulted in wider margins at the gross and operating levels to produce an outsized result on the bottom line as well. On the bottom line, the company reported $2.32 in GAAP earnings which is up 54% versus last year and beat by $0.27.
Turning to the guidance, the company is expecting strength to continue into the end of the year but once again supported by higher pricing. The company is expecting $7.3 to $7.5 billion in net 2022 sales supported by a 115 basis point increase in the average selling price. The takeaway is that growth is expected in the range of only 29% at the high end of the range which means growth is slowing and we see downside risk in the numbers. The rise in home prices and increase in mortgage rates is cutting deeply into activity and that trend is going to worsen as the Fed raises rates. The analysts, however, still see upside potential in the stock and have the price target pegged at $42.75. That target is about 45% above the current price action and the consensus is edging higher in the wake of the release.
The Technical Outlook: KB Homes Reverses Course, To Range-Bound
The price action in KB Home has hit a bottom and will likely reverse but not from downtrend to uptrend. In our view, the risks in the outlook will cap gains and possibly at the $35 level. In this scenario, we see the stock moving sideways until later in the year when new data is available. If the stock is able to rise above $35 a move up to $40 is possible but we don’t think it will happen without good news out of the housing market.