KB Home (NYSE: KBH)
looks ready to breakout after basing between $27.44 and $38.50 a share over the past three months.
The good news keeps rolling in for the homebuilders, but KB Home’s performance has been uneven in 2020.
That said, broader industry trends combined with company-specific reports give KB Home considerable upside moving forward. And unlike many of its peers, KB Home shares are not yet extended.
A Tough Spring… But Reason for Optimism
KB Home beat on earnings in Q2 2020 (the period ending March 31, 2020 for KBH), which wasn’t much of a surprise after the company beat estimates for every quarter over the previous two years. But revenue came in at $914 million, failing to meet expectations for $1.07 billion in revenue, and down from $1.02 billion in the year-ago quarter. Shares fell around 8% on the news.
Gross orders dipped 4% in March, 59% in April, and 42% in May, due to pandemic-related cancellations. But business saw a major uptick in June, with gross orders up 4% through the first three weeks of the month compared to the same period a year-ago. June 2019 was an excellent month for KBH, making the yoy increase even more impressive.
So why did KB Home struggle so much during the spring?
The company has high exposure to regions that have been severely impacted by the coronavirus, including the West Coast, Southwest, Southeast, and Texas.
But the June numbers show that people are adjusting to the new-normal, and you should expect comps to be more in line with June than with April/May going forward.
KB Home is Well-Positioned to Take Market Share
Work-at-home has been one of the foremost trends since the onset of the pandemic. And with many people realizing they no longer need to choose where they live based on the proximity to the office, there has been a mass exodus to the suburbs.
According to a survey by Arizona-based builder Taylor Morrison, additional rooms for working is now one of the top home buyer demands.
KB Home recently announced that it will offer dedicated home office construction. The “KB Home Office” will cost around $2,000 to $3,000 and will include several customization options.
And KB Home is no stranger to the build-to-order model, with it already representing roughly 75% of its business. And during Q2, its gross orders of personalized homes outperformed its orders on inventory homes.
With people expecting to spend more time at home in the future, it would stand to reason that they would be willing to spend more on their homes. The data bears this out for KBH: despite the tough quarter, the company was able to increase prices in around 60% of its communities.
Historic Strength in the Industry
Mortgage rates are at historic lows, with the average U.S. 30-year fixed mortgage coming in at under 3%.
And builder confidence is at the highest number in its 35-year history, matching the record level of December 1998.
The wind is at KB Home’s back.
Valuation is Attractive… And may be Better Than It Looks
KB Home is trading at around 14x forward earnings.
That is a very reasonable valuation is a frothy market, particularly when you consider KB Home’s industry tailwinds and improving performance.
But the forward estimates appear to be too conservative.
There is a good chance that we’ll see a combination of upward revisions and earnings/revenue beats over the remainder of 2020.
You don’t need me to tell you how shares would react in that scenario…
Look For a Breakout
There’s an argument to get into KBH right now due to its attractive valuation and upside. But it’s best to wait for the breakout since shares are currently right around intermediate-term resistance.
The technicals on KBH have been solid of late. The 50-day moving average crossed over the 200-day moving average a little over a month ago, and volume has dried up as shares have consolidated around the breakout point.
Look to buy if there is a convincing breakout above $39.
Buying at a Discount
Some of the best plays in the market are stocks that dip after one mediocre quarter but look primed for a quick recovery. KB Home fits the bill.
If shares can push through the $39 level on high volume, they would have a lot of room to run over the rest of the year.
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