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5 Factors That Underscore KB Home's (KBH) Solid Prospects

Zacks Equity Research

KB Home KBH has been riding high on rebounding housing market fundamentals, Returns-Focused Growth Plan and customer-centric approaches. Also, aggressive land acquisition and development, as well as an upbeat view for fiscal fourth-quarter 2019 are boosting investors’ sentiments.

In the past six months, its shares gained more than 32%, nearly double the industry’s 17.9% growth. Also, it has broadly outperformed the S&P 500’s 8.9% rise in the said period. The company’s fiscal 2019 earnings estimates jumped 6.7% over the past 60 days, reflecting solid prospects.

Notably, it surpassed the Zacks Consensus Estimate in each of the trailing 15 quarters. This positive trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #1 (Strong Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

What Makes the Stock an Attractive Pick?

Returns-Focused Growth Plan: KB Home achieves financial and operating growth from the Returns-Focused Growth Plan, which focuses on improving profitability of the business. The plan’s main components are executing the company’s core business strategy, improving asset efficiency and monetizing significant deferred tax assets. In the first nine months of fiscal 2019, its housing gross margin expanded 30 basis points year over year.

It is focused on core KB2020 business strategy that aims to boost scale in existing geographic footprint, improve profitability per unit, generate higher operating margin and drive earnings, while generating positive cash flow to redeploy for growth and debt reduction. In the first nine months of fiscal 2019, average community count grew 13.7% year over year. Moreover, the company expects to generate 12% average community count and more than 12% return on equity in fiscal 2019.

Built-to-Order Business Approach: The Built-to-Order approach is a boon for KB Home. This customer-centric move helps homebuyers to personalize their home with features and amenities of their choice. Not only has this approach given KB Home a competitive advantage over its peers, but also it has led to low-cost production and improved profitability.

Land Acquisition & Development Method: KB Home aggressively invests in land, mainly at high-end locations. This is crucial for community count and top-line growth. KB Home expects land investments to drive additional community openings throughout 2020 and year-over-year growth in average community count in the mid-single digit range in fiscal 2020.

Housing Market Fundamentals Remain Strong: The U.S. housing market started building up strength, given favorable mortgage rates and moderate home prices. The overall homebuilding industry remains positive owing to ongoing traffic trends that indicate higher inclination of buyers, thereby reflecting a slow but steady housing recovery. Notably, declining interest/mortgage rates, lower construction costs, low unemployment and increasing wages are somewhat offsetting the other ongoing headwinds.

This positive momentum is evident from the company’s net orders growth of 11.8% year over year in the last three quarters. Backlog (in terms of value) also increased 12.8% from the prior-year period.

Solid Prospects: KB Home has solid prospects, as is evident from the Zacks Consensus Estimate for earnings for the current year of $2.86 per share, indicating 67.3% year-over-year growth. Its earnings are expected to increase 21% year over year in fiscal 2020.

Moreover, its revenues are expected to grow 0.9% and 13.2% year over year, respectively, in fiscal 2019 and 2020.

Overall, the company — which share space with M/I Homes, Inc MHO, Meritage Homes Corporation MTH and PulteGroup, Inc. PHM in the industry — constitutes a great pick in terms of value investment, supported by a Value Score of B.

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