After strong 2022, will KB Home maintain the uptrend this year?

For the business world, 2022 was not a good year because the lingering pandemic uncertainties and inflation pressure took a toll on most industries. The construction sector navigated through the challenges with surprising agility, though at times it came under pressure from the volatile macro environment. Overall, companies benefitted from favorable inventory levels and stable demand.

KB Home (NYSE: KBH), a market leader in homebuilding, banks on its built-to-order business model and competitive pricing to stay on the growth path in 2023. Creating long-term shareholder value is a key priority for the company. Currently, it follows a cautious stance in capital spending, while keeping the share buyback and dividend programs intact.

Valuation

The Los Angeles-based construction firm’s market value increased steadily since the last earnings report, but the stock mostly traded sideways in recent weeks. KBH is still a fairly affordable stock, and the low valuation offers a buying opportunity. It is doubtful whether those interested in the stock would get a chance to buy it cheaper in the near future. Moreover, analysts predict a double-digit increase in share price this year.

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Also Read: KB Home Q3 2022 Earnings Call Transcript

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Jeffrey Mezger, KB Home’s chief executive officer, said during an interaction with analysts recently, “The factors supporting demand for homeownership remains strong, including favorable demographics, population and job growth in our served markets and rising rental rates, coupled with a limited supply of homes during the industry’s under-production of new homes and low levels of existing home inventory, particularly at the more affordable price points.”

Outlook

The good thing is that experts, in general, are bullish in their long-term outlook on the housing market. But some analysts have called for caution, citing recessionary risks. It is worth noting that despite the resilience, the housing market experienced weakness last year as the demand-supply gap widened. Demand is likely to remain elevated in the near future — as customers take a cue from the current trend suggesting that mortgage rates and home prices need not necessarily get better later.

It’s a well-known fact that the housing market is unpredictable, and is highly influenced by changes in mortgage rates. Also, it is likely that longer build times and persistent supply chain issues would affect deliveries this year, continuing the recent trend. The other concerns are the central bank’s hawkish monetary policy and high inflation, which will negatively impact homebuyer confidence in the long term.

Financials

The company’s quarterly earnings grew steadily over the years and reached a record high of $2.87 per share in the most recent quarter, which is up an impressive 79% year-over-year and above experts’ projections. The bottom line benefited from a 26% rise in total revenues to an all-time high of $1.84 billion, which also topped expectations. There was a 610 basis-point increase in operating margins to 17.7%.

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Also Read: Lennar continues to revise strategy to tackle housing market challenges

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It is widely expected that KB Home would report around 19% growth in revenues when it announces fourth-quarter results on January 11. The market is also looking for a 50% increase in earnings to $2.87 per share. After a positive start to the week, the company’s stock lost some momentum on Thursday and traded lower in the early hours of the session.