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KB Home Surges 82% Year to Date: Can the Bull Run Continue?

Zacks Equity Research

KB Home KBH has been riding high on continued progress of the Returns-Focused Growth plan and improving U.S. housing market backdrop.

Shares of this homebuilder have gained 81.9% year to date compared with the industry’s 48.1% rally. Also, it has outperformed the S&P 500’s 17.1% rise in the said period.

Earnings estimates for fiscal 2019 and 2020 have moved up 5.2% and 8.7%, respectively, over the past 30 days. 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’s Working in Favor of the Stock?

Strong Growth Initiatives: KB Home has been pursuing a Returns-Focused Growth Plan since 2016 to drive revenues, homebuilding operating income margin, return on invested capital, return on equity and leverage ratio. The plan’s main components are executing the company’s core business strategy, improving asset efficiency and monetizing significant deferred tax assets.

The company has been successfully executing the core business strategy (i.e. KB2020), which aims at boosting scale in existing geographic footprint, improving profitability per unit, generating higher operating margin and driving earnings, while generating positive cash flow to redeploy for growth and debt reduction.

Owing to solid execution of this plan, KB Home expects to increase earnings per share in fiscal 2019 by more than 150% relative to 2016. This will help the company to boost returns, with return on equity expected to accelerate from 6.3% in 2016 to more than 12% in fiscal 2019.

Rebounding Housing Market Fundamentals: The U.S. housing market started building up strength since the beginning of 2019, courtesy of declining mortgage rates. Also, moderate home prices have been adding strength to KB Home, and other homebuilders like Meritage Corporation MTH, D.R. Horton, Inc. DHI and Lennar Corporation LEN. KB Home believes that solid backlog level ($2.3 billion), declining mortgage rates, steady economic growth and favorable demographics will continue providing a healthy backdrop for the housing industry, thereby helping it to grow further in fiscal 2020.

Aggressive Land Acquisition Strategy & Built-to-Order Approach: The company invests aggressively in land acquisition and development, which are important for community count as well as top-line growth. After investing $188 million and $132 million in the first and second quarters of fiscal 2019, respectively, the company invested $174 million in new land acquisitions in the fiscal third quarter. KB Home expects the land investments to drive additional community openings throughout 2020.

Notably, during the fiscal first, second and third quarters, the company achieved 10%, 17% and 18% improvement in average community count, respectively, with growth in each of the four regions served. KB Home also expects average community count to increase 10% and 12% year over year, respectively, in the fiscal fourth quarter and 2019.

Meanwhile, KB Home’s Built-to-Order process provides buyers with a wide range of choices regarding major aspects of their future home and personalized customer experience through in-house community teams. This highly consumer-centric approach gives KB Home a competitive advantage over its peers. It also helped the company to achieve low-cost production.

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