KB Home Strong Revenue Growth Fails to Impress Investors

25 ก.ย.

Despite beating revenue expectations, KB Home (NYSE: KBH) saw its stock drop sharply after its Q3 CY2024 earnings report. The homebuilder's robust revenue growth of 10% year-over-year, reaching $1.75 billion, coupled with strong net earnings per share ($2.04), failed to prevent a significant decline in after-hours trading, where shares dropped 6%. This price action has left many investors questioning the sustainability of KB Home's stock, particularly amid rising interest rates and shifting housing demand.

Fundamental Overview
At first glance, KB Home’s fundamentals appear solid. Revenue of $1.75 billion exceeded analyst estimates of $1.73 billion by a margin of 1.4%, and their profit per share came in at $2.04, only slightly missing the consensus of $2.06. The company’s sales were buoyed by strong demand for affordably priced homes, especially as mortgage rates saw some moderation toward the end of the quarter.

However, several metrics raised concerns:
1. Gross Margin Decline: KB Home (NYSE: KBH) reported a 20.6% housing gross profit margin for Q3 2024, down from 21.5% in the same quarter last year. The slight decline reflects a mix of geographic factors and rising construction costs, particularly as the company expanded into different markets.

2. Backlog Decline: The company's backlog, a key indicator of future revenue, dropped 14% year-over-year to $2.92 billion, reflecting slower future sales growth. This decline, coupled with flat net orders for the quarter, is a worrying sign that demand might be softening in the coming quarters.

3. Inventory Build-Up: Inventories increased by 10%, indicating a cautious approach by the company, perhaps anticipating further slowdowns in demand or higher costs to meet future projects.

4. Capital Deployment: KB Home (NYSE: KBH) has focused on returning capital to shareholders, repurchasing $150 million in stock during the quarter, which brings their total repurchases for the year to $250 million. This capital deployment strategy reflects confidence in their long-term prospects, despite near-term headwinds.

Technical Outlook
Technically, KBH was trading in a long-standing rising trend before the earnings report. The stock’s year-to-date performance had been impressive, rising nearly 40% through Tuesday's close. However, after the earnings release, the stock dipped 6% in after-hours trading, signaling potential bearish momentum.

Key technical indicators to watch:
1. Ascending Triangle Breakdown: Prior to the earnings release, KBH was forming an ascending triangle, a bullish pattern suggesting the potential for a breakout. However, the failure to surpass the upper trendline combined with below-expectation EPS has triggered a breakdown below the lower trendline, indicating that further price correction may be in play.

2. Support Levels: Investors should closely watch the following support levels:
- $79: A key pivot where the stock found support between July and early September. A break below this level could lead to a stronger selloff.
- $72: This level coincides with the rising 200-day moving average, a critical support line from a technical standpoint. If the stock falls here, it may attract buyers seeking a longer-term opportunity.
- $64: If bearish momentum accelerates, this level would mark a significant retracement to the consolidation range seen earlier this year, potentially representing a more substantial correction.

3. Relative Strength Index (RSI): On Tuesday, KB Home (NYSE: KBH) closed with an RSI of 60.65, suggesting that the stock was neither overbought nor oversold. As of Wednesday morning pre-market trading, the stock was down 6.78%, and the RSI has dropped, signaling that the stock is approaching oversold territory. This dip could indicate a short-term buying opportunity if it stabilizes around key support zones.

Market Dynamics and Interest Rates
While KB Home (NYSE: KBH) managed to grow revenues and deliver solid earnings, the broader macroeconomic environment is weighing heavily on the stock. Elevated mortgage rates, which have been rising due to the Federal Reserve’s tightening cycle, continue to act as a headwind for homebuilders like KB Home (NYSE: KBH). The third quarter saw some softening in demand, particularly in June and July, as potential homebuyers struggled with the affordability crisis driven by higher rates.

However, in August, as mortgage rates slightly moderated, KB Home (NYSE: KBH) noted an uptick in net orders. This underscores the sensitivity of the housing market to even small changes in interest rates. A sustained decrease in rates could drive renewed demand, especially for KB Home’s affordably priced homes.

Long-Term Prospects and Guidance
Looking ahead, KB Home (NYSE: KBH) remains optimistic, providing guidance for full-year 2024 housing revenues between $6.85 billion and $6.95 billion, with an average selling price of approximately $490,000. The company expects its homebuilding operating income margin to hover between 11.1% and 11.2%, assuming no significant inventory-related charges.

CEO Jeffrey Mezger highlighted the company’s focus on both reinvestment and returning capital to shareholders, including their aggressive stock buyback program. The company’s investments in land acquisition and development are up 59% year-over-year, signaling a long-term commitment to growth even amid challenging market conditions.

Conclusion:
KB Home’s Q3 CY2024 performance demonstrates a strong foundation with decent revenue growth, solid earnings, and a disciplined approach to capital deployment. However, investors have reacted negatively due to lower margins, flat net orders, and concerns about the broader housing market.

Technically, the stock appears to be at a critical juncture. The breakdown of the ascending triangle, combined with a sharp post-earnings selloff, suggests further downside potential. Investors should closely monitor support levels around $79 and $72 for potential buying opportunities.

From a long-term perspective, the company’s investments in land and its ability to maintain profitability in a tough market are positive signs. However, until mortgage rates stabilize, the stock may remain volatile in the near term. That said, any signs of rate moderation could lead to a sharp rebound, especially given the company’s positioning in the affordable housing market.