Aligning Housing Starts With Sales Will Improve Capital Efficiency And Backlog Conversion

Key Takeaways

• Improved backlog turnover and alignment of housing starts with sales are expected to accelerate revenue recognition and support net margin improvements.
  
• Enhancements in build times, cost management, and share repurchases aim to maintain profitability and boost shareholder value despite mortgage-related headwinds.
  
• Volatile mortgage rates and economic concerns could impact KB Home's sales, demand, and earnings growth, with risks from trade policies affecting margins.

Catalysts

Operates as a homebuilding company in the United States.

• An improved backlog turnover ratio driven by reduced build times and a slightly increased inventory of quick move-in ready homes is expected to accelerate revenue recognition and positively impact earnings.
  
• The company plans to continue aligning housing starts with sales, thus maintaining capital efficiency while allowing for quicker conversion of backlog to closings, which should support stable revenue and improve net margins.
  
• Community openings are projected to increase in 2025, particularly for the spring selling season, leveraging favorable demographics to boost order pace, which could lead to revenue growth.
  
• Enhancements in build times and cost management, especially in materials like lumber and concrete, provide an opportunity to maintain or improve gross profit margins despite headwinds from potential mortgage concessions.
  
• Ongoing share repurchases, funded by strong operating cash flow and a healthy balance sheet, are expected to enhance earnings per share and returns on equity, supporting longer-term stockholder value.

KB Home Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KB Home's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.4% today to 8.9% in 3 years time.
• Analysts expect earnings to reach $713.1 million (and earnings per share of $10.7) by about January 2028, up from $650.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.1x on those 2028 earnings, up from 7.6x today. This future PE is lower than the current PE for the US Consumer Durables industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 2.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.74%, as per the Simply Wall St company report.

KB Home Future Earnings Per Share Growth

Risks

• The continued volatility of mortgage interest rates and broader macroeconomic concerns slowed KB Home's sales pace, potentially impacting future revenues.
  
• The company's internal sales goals were missed as rising mortgage rates tempered selling pace, which could negatively affect earnings.
  
• Despite an overall lower inventory of existing homes, affordability constraints due to rising mortgage rates could impact near-term demand and revenue growth.
  
• The uncertainty surrounding tariffs and immigration policies poses potential risks to trade labor and supply chain costs, potentially affecting net margins.
  
• Lowering housing revenue guidance for the coming year due to market dynamics, including volatility in mortgage rates, suggests potential risk to projected earnings growth.

Valuation

• The analysts have a consensus price target of $76.21 for KB Home based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $97.0, and the most bearish reporting a price target of just $60.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.0 billion, earnings will come to $713.1 million, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 8.7%.
• Given the current share price of $68.37, the analyst's price target of $76.21 is 10.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.