KB Home (KBH) Stock Up 41% YTD: Will the Rally Continue?

KB Home KBH has been constantly benefiting from the robust demand for homes and strong backlog level. Also, a strong lineup of community openings and solid a return-focused growth model has been adding to the positives.

Notably, shares of KB Home have gained 41.4% so far this year compared with the industry’s 21% rally. The price performance was backed by a solid earnings surprise history. The company’s earnings surpassed the Zacks Consensus Estimate in 13 of the trailing 14 quarters. Earnings estimates for fiscal 2021 have moved up 7% in the past 30 days.

The positive trend signifies bullish analyst sentiments and justifies the company’s Zacks Rank #1 (Strong Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

Major Growth Drivers

Strong Projection for Fiscal 2021: KB Home’s robust results in first-quarter fiscal 2021 were backed by a strong backlog level, a continuous line-up of community openings and a solid return-focused growth model. Backlog at the end of first-quarter fiscal 2021 totaled 9,238 homes (as of Feb 28, 2021), up 58.7% from a year ago. Further, potential housing revenues from backlog grew 74% from the prior-year period to $3.69 billion.

The company expects to generate $5.7-$6.1 billion in housing revenues and operating margin of 11-11.8% for fiscal 2021, which is largely attributable to the above-mentioned factors. Notably, the company reported total revenues of $4.18 billion in fiscal 2020.

Initiatives Driving Growth: KB Home has been focusing on driving revenues and home-building operating income margin, return on invested capital, return on equity and leverage ratio. For this, the company has been following a return-focused growth plan since 2016. The plan’s main components are executing the company’s core business strategy, improving asset efficiency and monetizing significant deferred tax assets. KB Home expects significant growth for fiscal 2021, attributable to a 74% year-over-year increase in backlog and its potentiality to match housing starts to net orders.

Notably, the company is also focused on its core KB2020 business strategy, which is directed toward boosting its scale in existing geographic footprint, improve profitability per unit, generate higher operating margin and drive earnings, while generating positive cash flow to redeploy for growth and debt reduction.

Improved Housing Market: Although mortgage rates rose slightly from mid-March 2021, the rates are still low from the year-ago period, thereby, driving the U.S. residential market of late. The robust demand for homes has been a boon for KB Home and companies like M.D.C. Holdings, Inc. MDC, Toll Brothers, Inc. TOL and Lennar Corporation LEN in the same industry, each currently carrying a Zacks Rank #2 (Buy). As a result of the strong housing market fundamental, KB home is confident about increasing its revenues for fiscal 2021.

Built-to-Order Approach: The company’s Built-to-Order model provides a vast range of choices to its customers, with a personalized experience through its in-house community teams. The client-focused approach helps homebuyers to design a home with features and amenities of their choice.

Owing to the model, net order growth for first-quarter fiscal 2020 led to a 35% year-over-year increase in net order value, which, in turn, fueled the expansion of backlog value to $3.69 billion, reflecting a 58.7% year-over-year rise on roughly 9,238 units. Thanks to the higher backlog, the company is confident about generating increased revenues for fiscal 2021.

Assertive Land-Acquisition Strategy: KB Home persistently remains focused on land acquisition and development activities mainly in high-end locations, which is critical for community count as well as top-line growth. Also, the company has a strong land-acquisition pipeline and it expects at least a 10% increase in its community count in fiscal 2022 to support market share gains and housing revenue growth.

In first-quarter fiscal 2021, the company invested $566 million in land acquisitions and development (higher than $405 million in first-quarter fiscal 2020). This helped it generate $241 million of net operating cash flow in first-quarter fiscal 2021.

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