KB Home’s Stock Price Can Move Higher, Here’s Why

Key Points

• KB Home had a solid quarter and raised guidance after backlogs showed sequential growth. 
• Cash flow and capital returns are solid, improving shareholder value over the last twelve months. 
• Analysts are raising their targets following the report, which may lead the stock to a new high. 

KB Home’s NYSE: KBH stock price can increase in 2024 despite struggles with traction following the Q1 release. The company is firing on all cylinders and driving value for shareholders with no signs of stopping. 

If anything, the F2024 guidance is weak because there is a change in the wind. The FOMC is on track to start cutting rates this year, putting the economy and housing market on the path to acceleration. The timing of the first cut is questionable, and the pace may be slower than currently indicated, but it doesn't matter; rates have peaked and there's nowhere for them to go now but down. That and the pent-up demand in the housing market will keep homebuilders busy for years. 

KB Home's Cash Flow Drives Value for Investors

KB Home had a decent quarter, with growth accelerating to 6.5% from the prior quarter's 6.0%. The $1.47 billion in revenue is 70bps better than expected on a 9% increase in deliveries offset by a 2.7% decline in average selling price. More significantly, the company sustained margin despite the deleveraging of home prices and produced better-than-expected results. Aided by share repurchases, net income rose by 10% and diluted GAAP earnings by 21%.

Internal metrics and guidance are favorable. The company's net new orders increased by 55% to drive a 5% sequential increase in the backlog. The value of new orders also outpaced volume growth by 300bps, proving some leverage for the results. The only bad news is that, despite an increase from the prior guide, the expected annualized revenue of $6.5 to $6.9 billion aligns with the consensus. It's no catalyst for a rally, but it doesn't give a reason to sell either.

KB Home Builds More Than Just Houses: Shareholder Value

The driving force for share price gains in KBH stock and other home builders is the cash flow, balance sheet, capital returns, and increasing shareholder value. KB Home's cash flow was sufficient in 2023 to maintain a fortress balance sheet while investing in growth, repurchasing shares, and paying dividends. The dividend is below average, yielding 1.15%, but safe and compounded by share repurchases. Share repurchases reduced the share count by 9% YOY at the end of Q1 and are expected to continue steadily through year-end. 

The balance sheet is in great shape. The cash position is down slightly but offset by increases in inventory and investments. Assets are up and liabilities down, resulting in increased shareholder equity despite the massive share repurchases. Shareholder equity is up 1.8%, and book value by 14%, and both are expected to improve sequentially as the year progresses. 

Analysts Are Leading KB Home Stock Price Higher

The analysts' consensus target is up 60% YOY and increasing after the Q1 release. The price target lags the market but is offset by the range of recent targets, which are well above it. Marketbeat tracks a half dozen revisions following the release, and only one includes a downward revision to the price target of $78, the highest target revision offered so far. 

The other revisions include targets ranging from $64 to $69, which is the hurdle. The $69 target aligns with the current action and may provide a ceiling for the market. If so, KBH could become range-bound or correct to lower levels before moving higher later in the year. 

The technical action is mixed. The stock is in an uptrend but shows resistance at $70, which could cap gains. The market set a new high following the Q1 release but sold off during the session, creating divergences in the indicators that may lead to lower prices. Critical support is at the 30-day moving average. It could sell off to lower lows if the market falls below that level. The next target for solid support would be $64, and the market could move even lower. If support at the 30-day EMA is sustained, shares of KBH could set a new high before summer.