KB Home Strong Results Lift Prices

KB Home NYSE: KBH is raising the roof for 2023; like all house parties, the year may not turn out as investors would hope. The company outperformed consensus estimates and gave favorable guidance driven by its relentless execution of backlog orders. This has revenue in Q1 and guidance for the year better than expected but still down on a YOY basis, with declines expected to accelerate into the back half of the year. There was a sequential improvement in order metrics, but backlogs are dwindling almost as fast as new orders on a YOY basis and cannot sustain momentum indefinitely. In this light, the company may be heading for a cliff and is not alone in the race. Lennar NYSE: LEN reported similar metrics. 

Regarding the FOMC and interest rates, the rate outlook might stabilize, but inflation is still hot, and rates are still high and rising, which will impact business. The real risk is bank-sector contagion. Mr. Powell tried to support the system when the FOMC hiked the last 25 bps, but his words rang hollow. With rates still rising, we can assume the banking crisis will worsen before it gets better. It will also impact the home buyer traffic, mortgage demand, and home builder results regardless of the undersupply situation.

KB Home Has Solid Quarter, New Orders Down 49% 

KB Home had a great quarter but was driven almost exclusively by reduced backlogs. The company reported $1.38 billion in revenue, which is down -1.0% compared to last year, but it beat the consensus estimate by 600 basis points, so got the market’s attention. The internals suggests the company has reached the peak of its revenue power due to a 3% decline in volume and a 2% increase in average selling price. The increase in average selling price is a surprise, given competitors have already reported YOY declines, so price growth should not be expected to continue. 

The company margin contracted but was less than expected, another ray of sunshine for investors to embrace. The margin contracted about 50 bps to leave the GAAP EPS at $1.45 or $0.35 better than expected. The offsetting factor is that EPS is still down compared to last year, and the margin is expected to contract during the year. The guidance, also better than expected but still negative, is that revenue will fall 15% at the top end of the range. 

Regarding backlog and new orders. The company’s backlog increased sequentially due to the Q1 pullback in mortgage rates and the onset of the spring building season. The bad news is that backlogs are down 42% YOY, and new orders are down 49%, trends that suggest business could slow more than the 15%  indicated by guidance. 

KBHome Still Generates Cash 

The home builders are cash-generating machines with solid balance sheets and pay reasonably reliable dividends. KBHome added another $500 million in repurchases to its capital allocation plans, worth about 16% of the market cap following the Q1 release. The news has sparked 2 analyst reports with 2 price target increases. The caveat is the Marketbeat.com consensus target is only flat compared to last month and last quarter and assumes the stock is fairly valued. This could cap gains for share prices in the near to short term.

Shares of KB Home surged following the report, but gains are already capped at a key resistance point. This point has been tested before and may keep the stock range bound in 2023. This level is near $40.