Why You Should Add KB Home (KBH) to Your Portfolio Right Now

KB Home (NYSE:KBH) KBH is expected to reap benefits from the resilient housing market and ongoing execution of the returns-focused growth plan. Also, focus on first-time buyers will aid the company in the near term.

Earnings estimates for fiscal 2020 and 2021 have moved 1.9% and 2.7% upward, respectively, over the past 60 days. Meanwhile, shares of this homebuilder have gained 15.5% over the past six months compared with the industry’s 21.2% rally.

Although its shares have underperformed the industry during the said time frame, the above-mentioned positive estimate revision trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #2 (Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

What’s Working in Favor of the Stock?

Strong Housing Fundamentals: The overall homebuilding industry looks promising for the second half of 2020, given ongoing traffic trends that indicate higher inclination of buyers despite a bit pricier market. Notably, less than 3% mortgage rates, declining unemployment rate and lower supply of existing homes for sales are somewhat offsetting headwinds like increasing mortgage delinquencies and rising lumber costs. Also, buyers are now seeking homes in lower-density areas, thereby boosting new home construction in such regions.

Although the industry is grappled with coronavirus-related woes, it has bounced back impressively since May. In fact, the industry attained some new highs in July on major data points. Notably, U.S. homebuilders’ sentiment rose to the highest level in the index’s 35-year history in August, per National Association of Home Builders, matching the December 1998 level. September reading is scheduled to be released on the third day of the next week.

KB Home and other industry players like Meritage (NYSE:MTH) Homes Corporation MTH, PulteGroup (NYSE:PHM), Inc. PHM, and D.R. Horton, Inc. DHI have been riding high on the back of solid homebuilding fundamentals.

Strong Growth Initiatives: KB Home has been pursuing a Returns-Focused Growth Plan since 2016 to drive revenues, homebuilding operating income margin, return on invested capital, return on equity and leverage ratio. The plan’s main components are executing the company’s core business strategy, improving asset efficiency and monetizing significant deferred tax assets.

It has been successfully executing the core business strategy (i.e. KB2020), which aims at boosting scale in the existing geographic footprint, improving profitability per unit, generating higher operating margin and driving earnings, while yielding positive cash flow to redeploy for growth as well as debt reduction.

Owing to solid execution of this plan, KB Home expects to increase earnings per share in fiscal 2019 by more than 150% relative to 2016. This will help the company to boost returns, with return on equity expected to accelerate from 6.3% in 2016 to more than 12% in fiscal 2019.

Focus on First-Time Buyers: KB Home remains focused on growing demand for entry-level homes. It focuses on giving customers the ability to personalize their homes at prices that are affordable relative to local median household income levels, in order to appeal to a wide array of consumers, primarily first-time homebuyers, and move-up as well as active adult homebuyers. In the fiscal second quarter, approximately 58% of homes were delivered to first-time homebuyers compared with roughly 55% in the year-earlier quarter.

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