Investors had been eyeing KB Home’s KBH third quarter earnings for insights into the broader housing industry with inflation steadily rising. Mortgage rates have continued to rise over 6% and are having a detrimental impact on the housing market.
August home sales reflected a slowing in the housing market. Sales of existing homes were down 0.4% from July and 20% from the year prior. Home sales in August were also at their weakest level since 2015 and KB Home’s guidance will help indicate the direction of the road ahead.
With that being said, KB Home and fellow homebuilder Lennar LEN recently beat third quarter expectations. Despite a third quarter earnings beat, KBH is down -6% since the release. Let’s take a closer look at KBH stock to see if its indeed time to buy.
Q3 Earnings: In its latest quarterly report, KB Home had earnings of $2.86 a share, posting an earnings surprise of 6%. This represented 78% earnings growth from the year prior. Revenue came in at $1.84 billion, which represented 26% year of year growth. CEO Jeffrey Mezger said the company still had a backlog of over 10,700 homes valued at more than $5.2 billion.
While KB Homes achieved the low end of its revenue guidance, the company’s 27% gross margin was a highlight, up roughly 5% from the year prior.
Guidance: KB Home’s Q4 sales guidance of $1.95 to $2.05 billion came in well below the Zacks estimate of $2.45 billion. The lower revenue guidance is contributed to KBH’s recent post-release drop. Management cited the continuation of industry challenges such as higher mortgage rates as a reason for their subdued revenue outlook.
Year to date, KBH is now down -39% to underperform the S&P 500’s -22%. KB Home is also 46% off its 52-week highs seen last January. On a larger scale, KBH is up +21% over the last five years vs. the benchmark’s +51%.
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Trading around $26 a share, KBH has a forward P/E of 2.7X, which is just below the industry average of 3.3X. This is well below its five year high of 17.7X and the median of 8.8X. While KBH’s low P/E indicates it trades at a discount relative to its past, estimate revisions are trending down since the Q3 earnings release.
KBH currently holds a Zacks Rank #5 (Strong Sell) given its downward earnings estimate revisions. Despite the third quarter earnings beat, the company’s lower guidance is cause for concern with the housing market suffering as interest rates rise.
Mortgage rates have ticked over 6%, the highest level since the financial crisis in 2008. This will continue to be a deterrent for homebuyers. KB Home’s backlog cancellation rate increased to 9%. KBH executives said this was below historical levels, but it may be reason for investors to be cautious. The overall cancellation for gross orders during the third quarter was 35%, alarmingly up from the 17% gross cancellation rate the company saw during the second quarter.
Buyer’s remorse was stated as the cause for many cancellations. Management mentioned buyers were approved financially but did not feel comfortable moving on with the purchase. High mortgage rates and the ill effects of an inflated economy could lead to more buyer’s remorse and continue eating away at KB Homes $5.2 billion backlog.
For now, investors may want to stay away from KB Home’s stock until mortgage rates begin leveling off or start to come down. This could potentially take some time but the instability in mortgage rates should make investors cautious of catching a falling knife in KBH’s stock.
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