It’s Not Time To Sell KB Home … Yet

KB Home, Another Reason Not To Trust The Rebound 

KB Home NYSE: KBH is yet another business giving a reason why you shouldn’t trust the rebound in stocks. The company reports near and long-term headwinds are mounting and cutting into the business. Supply chain shortages, materials supply, and labor issues are preventing the company from starting homes and that means it can’t complete homes or finish homes. When it can’t finish homes it doesn’t make money, when it doesn’t make money it misses its targets and when the market sees these issues setting up it will reduce its targets. When the market reduces its targets for earnings it can bring down the major indices. KB Home is not an S&P 500 company but competitors Pulte and Lennar are, and they are most likely having the same kinds of problems. 

“While we grew our revenues 23%, as the quarter progressed, supply chain issues intensified and an already-constrained construction labor force was further stressed, which extended our build times and delayed completions and planned deliveries. We will continue to work on addressing issues as they arise to navigate these challenges,” says CEO Jeffrey Mezger.

KB Home Grows On Price Increases, Demand 

KB Home had a great quarter but there are two things that bother us. The first is the 22.8% increase in revenue is due almost entirely to pricing increases. The number of homes delivered was essentially flat versus last year and boosted by a 22% increase in average selling price. The second is that revenue, while strong, fell short of the consensus by 680 basis points in a world where demand and backlogs suggest revenue should not only be growing organically but also outpacing estimates. 

Regardless, the combination of demand and higher pricing produced wider margins at both the gross and operating levels. The gross margin improved by 160 basis points while the operating widened by 220 to drive leveraged gains on the bottom line. The GAAP EPS of $1.47 is up 44% from last year but still fell short of the Marketbeat.com consensus estimate. Looking forward, the company is expecting slightly better revenue and earnings than previously forecast but once again this is due to pricing and not volume growth. Eventually, the market is going to push back on pricing increases as we have already seen begin in the used car market. 

KB Home Is A Super Cheap Dividend, Headwinds Or Not 

Looking at KB Home from the dividend perspective, it is among the cheapest and most reliable dividends on the market. The stock is trading for only 3X its earnings which is a ridiculously low figure for a company whose business problem is having too much work for the labor and supplies at hand. The yield is near 1.7% and well above the broad-market average as well as coming with a strong balance sheet and positive outlook for distribution growth. The company has been raising for the last 3 years at a near 50% rate and is still only paying out 10% of its earnings. KB Home may not continue increasing the distribution at such a robust rate but we do expect to see healthy increases on an annual basis for the next couple of years. 

The Technical Outlook: KB Homes Tests Support 

Price action in KB Home fell in the wake of the Q1 results and is testing support at the $24.35 level. This level is coincident with a gap that formed in 2021 and is a key level of support. If the market follows through on early action and confirms this level we see the stock trading sideways until the outlook for revenue and earnings clears. If not, this market could fall below $34 and possibly below $30.