Building A Bull Case For KB Home (NYSE:KBH)

KB Homes Revenue Falls, Shares Rise

KB Home (NYSE:KBH) didn’t exactly have a great quarter and yet shares are rising. The company reported a double-digit decline in revenue that is driven more by the pandemic than by demand or business. If not for the hiccup in building, the supply chain disruptions and the slow rebound in hiring the company would be producing YOY growth.

Looking at things from the employment standpoint, we’ve yet to recover all the construction jobs lost in the spring of 2020 but we’re well on the way. The data from ADP shows that construction jobs ended 2020 down about 0.4% but well recovered from the March low. The more recent data shows a steady expansion of hiring in the construction industry that will aid industry growth over the coming year.

KB Homes Rises After Revenue Beat

KB Homes reported $1.19 billion in net revenue or down about -23.7% from the previous year. The decline in revenue is surprising given the demand for housing but COVID had a major impact on the industry that is yet to be recovered. In terms of the analyst’s consensus, the take is about $0.04 billion better than expected or 350 basis points. The even better news is that, while deliveries declined by about 30% the average selling price increased. The average selling is up 5.0% from last year and expected to continue rising in 2021.

Moving down the report, the increase in selling price and company efforts to streamline and control costs resulted in a 40 basis point improvement in gross margin. Gross margins came in at 20% and drove a substantial beat on the bottom line. The company’s GAAP EPS came in at $1.12 or $0.18 better than the consensus estimate.

Looking forward, the company gave strong guidance that is backed up by rising order volume and backlog. The company’s Q4 order volume rose 50% on a YOY basis to drive backlogs to a 15-year high. The backlog of ordered homes is up 63% and worth about $3 billion in future income. That’s about 3 quarters at the recent pace of activity. Execs are expecting revenue growth and earnings leverage in 2021 and are actively ramping land acquisition and development to support future growth as well.

"Our favorable outlook is supported by the composition of our backlog, a strong line-up of planned community openings, and a leaner, more efficient operation," said Chairman, President, and CEO Jeffrey Mezger. "Most notably, we expect meaningfully higher revenue and earnings in 2021 to drive significant expansion of our return on equity."

KB Homes Is A Deep-Value For Dividend Growth Investors

The entire home building industry is trading at a very low valuation relative to the broad market and KB Home is no different. What is different is that KB Homes is trading at an even deeper discount than its peers. The stock is valued at roughly 7X this year’s and 6X next year’s compared to a slightly higher 8 or 9X this year’s and 7 or 8X times next years for Pulte (NYSE:PHM) and Lennar. (NYSE:LEN)

In terms of the dividend, this company is yielding about 1.75% with a high-expectation of future increases. The company has only been increasing for 3 years but at a high 33% CAGR and with a very low 13% payout ratio. Add in the fact the company is carrying low debt and large amounts of cash on the balance sheet and has ample FCF, and the odds another large increase will come in 2021 only grow.

The Technical Outlook: KB Home Is Moving Up Within A Range

Shares of KB Home are up more than 5% in the early premarket action on the better than expected results and positive outlook. The move confirms what looks like a double bottom reversal at the $32 level but there is a caveat. While the reversal looks good, it may only be within the existing trading range which has resistance near $38 and a possible top near $42. Longer-term, if the company is able to execute on the outlook shares should continue to rise and set new 15-year highs