A Building Opportunity In KB Home

KB Home Falls After Weak Q2 Revenue

Shares of KB Home NYSE: KBH are down 6% in early trading because the company missed the consensus expectation for revenue. While we don't like to see a company miss the consensus expectation, the expectations were high and the range of estimates broad so we aren't reading too much into the headlines. What we do see is an opportunity building up in this stock for dividend growth investors. Despite the headwinds, the homebuilders are in a golden age and have many years of robust business ahead of them. Once you look past the revenue miss, there's not a single thing not to like about this report.

KB Home Misses On The Top Line

KB Home missed the consensus estimate for top-line revenue by 270 basis points. That is not something we like to see but when looked at from the right perspective doesn't come with quite the sting it might. From another angle, the company's revenue is up 57.6% from last year on the combination of demand and pricing, and that strength is seen all the way through to the bottom line. In regard to homes delivered and selling price, the number of homes delivered increased by 40% and was compounded by a 13% increase in average selling price.

The combination of pricing and leverage helped the company expand gross margins by 320 basis points to 21.4%. Ex-inventory charges that figure rises to 21.5%, while SG&A expenses as a percentage of revenue declined by 250 basis points. Operating income margin improved to 11.3% and helped drive a 173% increase in GAAP earnings. The GAAP earnings of $1.50 beat by 18 cents and put the company firmly on track to exceed the full-year consensus.

The company did not give any formal guidance but did Issue a rather favorable statement. Along with that, internal data such as backlogs, net orders, and cancellation rates all point to strong results as well. The company's backlog value increased 126% to $4.29 billion on a 145% increase in net orders. In terms of value, net orders are up 190% with both volume and value setting a 14-year high for Q2.

KB Home's Dividend Looks Better Than Ever

KB Homes dividend isn't large in terms of its yield at 1.38% but it is a strong payout. Not only is there a high expectation for future increases but those increases should be substantial and are compounded by the company's efforts to improve the balance sheet. Over the past quarter, it was able to refinance debt in a way that extended the average maturity and reduced the overall cost. In response, The firm got a credit upgrade from Moody's that we view as favorable. 

Now, about the expectation for dividend increases. The company has increased the dividend the past two years in tandem with business acceleration and the metrics are highly favorable for future increases. The payout ratio is only 10% of earnings consensus, earnings are exceeding the consensus estimate, and the distribution cagr is 40%. If there were a stock to bet on for an aggressive dividend increase, this would be it.

The Technical Outlook: KB Home Falls Back To Firmer Support

Shares of KB Home are down 6% in early trading and look like they might fall further. The caveat for any bears out there is that price action is now sitting just above a potentially strong support level with indicators consistent with support buying. If the $40.50 level doesn't hold up there could be a pullback to the $38 level or lower but, in either case, we think the stock is a good buy trading around 7X its earnings.