The hopes of a less hawkish Fed and lower interest rates could give a boost to the broader housing industry and two well-known stocks offering exposure to the space are KB Home (KBH) and Zillow Group (ZG).
With KB Home and Zillow stock off to strong starts this year, let’s see if it’s time for investors to buy into their rallies.
Performance Overview
Mortgage rates continuted to climb to their highest levels in 20 years after skyrocketing over 7% in October and affecting many companies in the broader housing industry.
This certainly had an ill effect on KB Homes' stock last year as one of the largest and most recognizable homebuilders in the United States. Similarly, shares of Zillow Group were submerged in volatility with the company being the largest online real estate and home-related provider in the country.
However, KB Home and Zillow stocks were more resilient than one might have imagined and are having strong performances so far this year. Year to date, Zillow stock has soared +34% Vs. KB Home’s +26% with both outperforming the S&P 500’s +4%.
Even better, KB Home stock is still up +121% over the last three years to easily top the benchmark and Zillow’s +20%.
Image Source: Zacks Investment Research
Valuation
With such impressive year-to-date performances, monitoring Zillow and KB Homes’ valuation will be important. Both stocks currently trade around $40 a share.
However, Zillow stock is still 24% from its 52-week high and trades at 37.4X forward earnings. In comparison, KB Home stock recently hits its 52-week highs and is still trading at just 8.8X forward earnings. KB Home also trades 92% below its decade high of 115X and at a slight discount to the median of 10.9X.
Image Source: Zacks Investment Research
Even better, KB Homes’ price-to-earnings valuation is nicely below the S&P 500’s 18.3X and on par with the Building Products-Home Builders industry average. While Zillow stock is above the benchmark’s P/E valuation and the Internet-Services industry average of 27.7X it does trade much more reasonable than its extreme decade highs and the median of 437.4X.
Growth & Outlook
Monitoring the growth of both companies will help clarify if investors should be paying a premium for Zillow stock and if KB Homes' low P/E valuation is a bargain.
Looking at Zillow, earnings are expected to dip - 21% in fiscal 2023 but rebound and climb 55% in FY24 at $1.74 per share. However, earnings estimate revisions have trended down for both FY23 and FY24 throughout the quarter.
Sales are forecasted to drop -71% this year to $1.85 billion compared to $6.18 billion in 2022. Fiscal 2024 earnings are expected to stabilize and rise 13% to $2.09 billion.
Image Source: Zacks Investment Research
Pivoting to KB Home, earnings are projected to drop -50% this year at $4.52 per share after stellar growth in 2022 with EPS at $9.12 primarily attributed to the company’s backlog despite inflationary concerns affecting future business.
Still, fiscal 2024 earnings are forecasted to rebound 15% at $5.21 per share. Even better, earnings estimates have started to go up again after the company blasted its first-quarter bottom line expectations last week.
On the top line, sales are now forecasted to be down -22% this year and then rise 3% in FY24 to $5.57 billion.
Image Source: Zacks Investment Research
Bottom Line
At the moment, KB Home (KBH) stock sports a Zacks Rank #2 (Buy) with Zillow Group (ZG) landing a Zacks Rank #3 (Hold). Both companies remain viable investments for exposure to the broader housing industry and should have solid growth as inflationary concerns begin to ease.
With that being said, KB Homes may already be on this trajectory and investors should consider buying KBH stock as the company’s P/E valuation is attractive along with the rising earnings estimates. Zillow stock could have more upside from its current levels as well, and holding on to ZG shares may be rewarding but there might be better buying opportunities ahead.
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Free: See Our Top Stock And 4 Runners UpKB Home (KBH) : Free Stock Analysis Report
Zillow Group, Inc. (ZG) : Free Stock Analysis Report
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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.
