Here's Why Investors Must Add KB Home (KBH) to Their Portfolio

KB Home KBH is benefiting from improved housing demand trends and reduced cancellation rates, showcasing an increase in homes delivered and net new orders growth. The improving trends are further backed by the company’s implementation of the Build-to-Order approach, accompanied with land buyout initiatives.

Shares of this Zacks Rank #2 (Buy) company have risen 54.5% in the past six months, outperforming the Zacks Building Products - Home Builders industry’s 53.1% growth.

The Zacks Consensus Estimate for the company's fiscal 2024 earnings has risen to $7.82 per share from $7.79 in the past seven days. The estimated figure depicts 11.2% growth from the prior year’s reported levels. KBH delivered a trailing four-quarter earnings surprise of 26.1%, on average. The growth prospect is further solidified with a VGM Score of A, backed by Value and Growth Scores of A. The positive trend signifies bullish analysts’ sentiments, robust fundamentals and the continuation of an outperformance in the near term.

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Although increased costs and expenses along with the cyclical nature of the business are potential headwinds, growth in housing demand, reduced cycle times and the efficient execution of various strategic initiatives are encouraging for KBH’s prospects.

What Makes the Stock Attractive?

Built-to-Order Approach Bodes Well: KB Home primarily executes strategies to foster its consumers’ demand patterns and increase growth prospects along the way. One such consumer-centric strategy is the Built-to-Order approach wherein it provides buyers with a wide range of choices in the major aspects of their future home, along with a personalized customer experience through in-house community teams. The company follows a strategy of initiating construction only after the execution of a purchase agreement. This reduces inventory risk, enhances efficiencies in construction and provides greater visibility as well as predictability on future deliveries.

Furthermore, KBH’s recently introduced targeted rate buy-down programs, implemented to increase buying confidence among buyers (built-to-order buyers), are encouraging toward sparking home closing numbers. The company anticipates having its primary focus on increasing Built-to-Order sales, given the improving mortgage interest rates, along with improving cycle times and ramping up housing starts.

Improving Housing Demand: Given the normalizing economic conditions and improving housing demand trends, KBH is witnessing notable growth in its net new orders, sequentially as well as on a year-over-year basis, moving into fiscal 2024.

In the first quarter of fiscal 2024, net new orders grew 55% to 3,323 units and the net order value increased 58% to $1.58 billion, year over year. Improved demand patterns accompanied by lower cancellation rates aided the uptick. The cancellation rate, as a percentage of gross orders, improved to 14% from 36% reported in the year-ago period. Furthermore, KBH’s mortgage concession initiatives are also encouraging consumers’ sentiments, thus fostering housing demand.

Land Buyout Strategies: KBH invests aggressively in land acquisition and development, mainly in high-end locations, which is critical for community count as well as top-line growth. This has eventually helped the company in reducing debt. It remains optimistic that this blend of rising active inventory while reducing annual interest incurred will boost future gross margin and returns.

At the end of the first quarter of fiscal 2024, the company’s lot position was 55,509, of which 72% were owned and 28% were under contract. KBH states that it owns or controls the majority of the lots required to reach the expected delivery targets through 2025. Furthermore, KB Home aims to continue prioritizing investing in land acquisition and development to cater to its growing demand and increase prospects.

Other Stocks to Consider

Here are some other top-ranked stocks from the Construction sector.

NVR, Inc. NVR currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NVR delivered a trailing four-quarter earnings surprise of 8.1%, on average. The stock has rallied 35.9% in the past six months. The Zacks Consensus Estimate for NVR’s 2024 sales and earnings per share (EPS) indicates growth of 7.7% and 4.6%, respectively, from the prior-year levels.

Vulcan Materials Company VMC currently sports a Zacks Rank of 1. VMC delivered a trailing four-quarter earnings surprise of 19.5%, on average. The stock has risen 35.8% in the past six months.

The Zacks Consensus Estimate for VMC’s 2024 sales and EPS indicates an improvement of 1.3% and 19.6%, respectively, from the year-ago levels.

Sterling Infrastructure, Inc. STRL presently sports a Zacks Rank of 1. It has a trailing four-quarter earnings surprise of 20.4%, on average. Shares of STRL have risen 52.5% in the past six months.

The Zacks Consensus Estimate for STRL’s 2024 sales and EPS indicates an improvement of 11.7% and 11.4%, respectively, from the prior-year levels.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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