We marked KB Home (NYSE: KBH) earlier this year when it turned out that the institutions had put a floor in the stock. While the KB Home market has since plunged to new lows, institutional support remains high and suggests a recovery is in the offing. The caveat for investors is that a bottom doesn’t mean a reversal and price action could cap later in the year.
The company reported solid revenue growth and wider margins, predicting more of the same, but the details leave something to be desired. The gains in sales, margin and profit are due to a single factor, price increases, which ultimately hurts the pace of business. In this scenario, the company can be expected to produce solid results for the foreseeable future, but we expect no growth, no real growth, which is bad news in the eyes of the market.
As for the institutions and their support, the sell side has made net purchases for the past 9 consecutive quarters and raised nearly 8% of market cap over the past four quarters based on a closing price of $29.65. This has taken their total holdings to nearly 90% and is growing despite some evidence of intra-group rotation. The bottom line is that, rotation or not, the institutions still see the advantage in the name and should support price action in the near to short term. Insider activity is also telling, the insiders lost stock last year, but they shut down in the third quarter of 2021 and haven’t let go of one since.
KB Home had a good quarter in terms of operations, revenue and profit and it resulted in some changes in the analyst’s estimates. The company reported consolidated sales of $1.72 billion, a 19.4% gain from last year. Sales also beat consensus by 366 basis points, but this is where the good news starts to sour. The profit in turnover is 100% due to a 21% increase in the average selling price, offset by a small decrease in volume. The increase in the selling price also resulted in wider margins at gross and operational levels, which also results in an outsized result in the bottom line. Overall, the company reported $2.32 in GAAP revenue, a 54% increase over last year and a $0.27 profit.
Looking ahead, the company expects strength to continue through the end of the year, but again supported by higher prices. The company expects net sales of $7.3 to $7.5 billion in 2022, supported by an increase of 115 basis points in the average selling price. The upside is that growth is expected in the range of just 29% at the high end of the range, meaning growth is slowing down and we’re seeing downside risk in the numbers. Rising house prices and rising mortgage rates are weighing on business, and that trend is set to worsen as the Fed raises interest rates. However, analysts still see upside potential in the stock and have set the price target at $42.75. That target is about 45% above the current price action and the consensus is moving higher in the wake of the release.
The technical outlook: KB Homes reverses course, to reach-bound
The price action in KB Home has bottomed out and is likely to reverse, but not from a downtrend to an uptrend. In our view, risks in the outlook will limit gains and possibly at the $35 level. In this scenario, we see the stock moving sideways until later in the year when new data is available. If the stock can climb above $35, a move to $40 is possible, but we don’t think it will happen without some good news from the housing market.