KB Homes (NYSE:KBH) On Watch Ahead Of Earnings

KB Homes Is A Buy

The way the news is coming out of the housing sector the entire home-building group is a buy. With KB Homes (NYSE:KBH) slated to report earnings after the bell today, it is on-watch. The company is expected to deliver revenue and EPS growth in the range of 6% and 13.5% and I’m here to tell you to expect a beat. Not just because KB Homes has beaten EPS consensus 100% of the time over the past two years, but because the analysts haven’t been responding to the data.

The analysts are generally bullish on this stock but that’s not saying much. The average rating is a buy but only a weak buy with more analyst neutral than not. Over the past three months, only 2 analysts have increased their EPS target while 8 have lowered their EPS and revenue targets. None have increased their revenue targets, a fact I find surprising. The good news is that the analyst’s community is more likely than not to begin upping their ratings and estimates.

The Outlook Is Good, And Far To Conservative

Looking forward, the company is expected to produce a small increase in revenue but a -11% decline in EPS for the year. Frankly, this outlook is wrong. It is based on an expectation for declining business and that is just not what this company is producing.

The first-quarter results not only beat expectations but came in ahead of the previous year and show an acceleration from 2019 to 2020. Add to this an expectation for growth in the second quarter I think too low, and an outlook for accelerating business later this year, and the odds of full-year EPS and revenue far outpacing current consensus grow.

The first quarter (actual) and second quarter (estimated) EPS equals $1.21. With full-year consensus at $2.58 that leaves only $1.37 for both the 3rd and 4th quarters. Looking at last year’s results, business accelerated into the 3rd and 4th quarters with combined revenue totaling $2.10. Assuming the companies backlog grew over the quarter the way it did with Lennar (NYSE: LEN), I think the upward revisions, when they come, are going to be big.

Looking at the data, there is just no reason not to think a boom in housing has already started. The New Home Sales figures show a solid double-digit month over month and year over year increase, and the figures are backed up by the permits figures. The permits and NAHB figures, both leading indicators of future starts and sales, both surged in the last month showing demand is still strong and ready to build.

Growth, And A Dividend Too?

Not only is KB Homes a growth story but it’s a dividend-payer too. The only drawback is the yield, about 1.0%, isn’t that great. The upshot is that the payout is safe, KB Homes is sitting on a pile of cash, there is ample free-cash-flow and well-supported business. The payout ratio is running in the low teens as well, which means there is at least a possibility for an increase if not an expectation for one.

The Technical Outlook: New Highs On The Way

The technical outlook for KB Homes is bullish. The stock has made a stunning Vee-shaped recovery from the pandemic-low and looks set to retest if not exceed the all-time high. Today’s pre-release action has the stock down more than 3.0% and presenting what I would call a textbook entry.

What makes it a textbook entry is this; after consolidating the rally near the highs of the move price action is pulling back to support while support is confirmed by the indicators. The stochastic is already showing a strong bullish entry signal and the MACD is set to follow. All that is left to happen now is the earnings release and subsequent market response. Assuming the report is as good as I expect, price action should confirm with a nice move up in the after-hours session.