KB Home Hits Peak: Pullback Imminent

Key Points

• KB Homes had a solid quarter and raised guidance. 
• Guidance is still weak, considering the Q2 strengths. 
• The pullback may not be deep, but gains could be capped for 2023. 

KB Home NYSE: KBH reported a solid quarter and raised guidance, but the news may not be enough to keep the market moving higher. While better than expected, the results and guidance point to a top in the housing market that some builders have already hit. KB Home produced surprise growth in Q2, but growth is evaporating in a market where demand remains sluggish, and prices are falling. What this means for KB Home is a ceiling for price action that could cap gains for the remainder of the year.

The strength is driven by a rapidly diminishing backlog that suggests this market is heading for a revenue and earnings cliff. Call it a Wall of Worry, but there are few compelling reasons to be in the home builder market with shares trading at such lofty levels. 

KB Home Beats, Raises Guidance: Backlog Down Double Digits

KB Home had another stellar quarter in which revenue and earnings exceeded the Marketbeat.com consensus estimate. The company brought in $1.77 billion in net revenue for a gain of 2.9% YOY that, beat the consensus by 2400 basis points, so the performance is noteworthy.

The increase was driven by a 6% increase in deliveries offset by a 3% decline in average selling price. The strength carried through to the bottom line, good news, and left the GAAP earnings at $1.94 or $0.60 better than expected. 

The bad news is in the order and backlog details. Net orders increased nearly 100% sequentially and 1% YOY but are offset by an 11% decline in average price. That suggests a 10% decline in YOY revenue which is confirmed in the guidance. More importantly, the 1% increase in orders does not offset the 6% increase in deliveries and accelerated the decline in the backlog.

Backlogs are down 43% compared to last year and point to a rapid “normalization” of the industry. Without the deep well of backlogs to draw from, investors should not expect KB Home to produce the same outperformance in the back half of the year and 2024 as it has shown in the last few quarters. 

There is risk in the guidance. The company raised its full-year revenue target and narrowed its expected average selling price to above the analysts' consensus figure. That’s good, but guidance is down 10% YOY and predicated on the spring uptick in housing traffic. That was caused by a downtick in interest rates that will not last long.

The FOMC has indicated at least 2 more interest rate hikes are coming, which will put the average mortgage back above 7.0% and into the 7.5% to 8.0% range. In that environment, homebuilders and investors should expect traffic to slow and demand to fall. 

KB Home Delivers Value To Shareholders 

KB Home, despite the gloomy outlook, delivers value to shareholders. The company pays a safe 1.15% dividend yield and engages in repurchases that add value to the stock. The company’s book value increased to $46.72 in Q2, which is good but still well below the price.

The analysts are raising their targets due to the revised guidance, but even they see the stock as fairly valued at the current levels. In this light, KBH stock may not pull back significantly, but a rally is not expected either. 

The market pulled back more than 2.0% in premarket trading to confirm resistance at the prior high near $52. If the market follows through on that signal, the stock could return to the $48 level or lower. The short-term EMA is always a good target for support in these situations and is near the $47.50 level. A fall below there would signal real trouble for the market and bring the $40 level into play.