Opinions
Andrew Moffs
KB Home
KBH-N
BUY ON WEAKNESS
Mar 30, 2021
Are a U.S. homebuilder in 40-50 markets with a long track record. He really likes their 1.4x price to book value vs. peers around 2.1x. Likes their built-order model which offers better pricing power and wider margins. KBH good value. No, he doesn't see a Canadian housing crash. Rather, there's a supply shortage, particularly in cities like Toronto and Calgary, restricting more single-family homes. Eventually, the government will welcome more immigrants which will exacerbate supply further. That said, borrowing costs remain historically low.
$46.700
Stock price when the opinion was issued
contractors
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TOP PICK
Stockchase Research Editor: Michael O'Reilly The US based home builder is again reiterated as a TOP PICK. Recently reported earnings showed a 35% increase in the number of homes delivered with average sales prices up 11% -- helping to propel EPS above analyst expectations. Trading at 8x earnings, compared to peers at 18x is trading at 1.5x book value. It pays a small dividend (that has tripled over the past 3 years) that is backed by a payout ratio under 15% of cash flow. We recommend trailing up the stop (from $32) to $38, looking to achieve $53 -- upside potential over 20%. Yield 1.38% (Analysts’ price target is $53.00)
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PAST TOP PICK
(A Top Pick Nov 18/21, Down 12.8%)Stockchase Research Editor: Michael O’Reilly Our PAST TOP PICK with KBH has triggered its stop at $38. To remain disciplined, we recommend covering the position at this time. This will result in a net investment loss of 10%, when combined with the previous buy recommendation.
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COMMENT
An analyst downgraded it today. The averaging selling prices for homes remain great, says the company, without signs of slowing. Q1 revenues were up 23% but slightly missed estimates. It's down nearly 10% in the past week. They fell short on the top and bottom lines. However, they have a very strong backlog to fulfill and management maintained their full-year forecast as the company expects higher prices. It now trades at a big discount to book value. Instead of buying back shares (at low share prices), the company would rather buy more homes. The homebuilders are cyclicals . Also, can they execute? Supply china shortages are a problem.
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COMMENT
Home demand will remain strong will at least the end of the year, though skyrocketing labour and materials costs like lumber and metals are a a problem. Last week, KBH reported a disappointing quarter, though management raised parts of guidance. The averaging selling prices for homes (and demand) remain great, says the company, without signs of slowing. It trades at only 3.3x this year's earnings, so it could be a bargain. Q1 revenues were up 23% but slightly missed estimates. They reported great numbers in California. Shares are down nearly 10% in the past week after they fell short on the top and bottom lines last week. However, they have a very strong backlog to fulfill, and management maintained their full-year margin forecast as the company expects higher home prices. The CEO says their biggest challenge is completing homes. Shares now trade at a big discount to book value. If they start buying back stocks, he's in, but if not, he's on the sidelines.
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WATCH
They report Tuesday. Housing the linchpin of the economy and prices keep climbing. We need to hear if they will build more homes or keep the supply so tight that housing prices won't come down. The buildings are limiting supply to keep gross margins up and prices up, but it's terrible to fight inflation. Housing stocks have hung up because we have a housing shortage, but how long can this last when we see pushback on the prices of other items like dining out, apparel and airline tickets, all of which have risen dramatically in the last 5 years.
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DON'T BUY