KB Home (NYSE: KBH) is no high-yielding or hyper-growth stock, but there is more to capital returns and shareholder value than that. Despite numerous economic headwinds and widespread housing industry normalization forced by the Fed, this company generates significant cash flow and uses it to build shareholder value. The company builds value by investing in its future, paying down debt, building its cash position and repurchasing shares. The net result in F2023 is a 15% increase in book value, and the expectation is for these trends to continue in 2024. Here’s why.
Better-than-expected results suggest the bottom is in
KB Home had a tough quarter but worked hard to improve build times, which aided efficiency, deliveries and the bottom line. The company’s $1.67 billion in revenue is down 14% compared to last year but outpaced the Marketbeat.com consensus by 300 basis points, and leverage was seen on the bottom line. Revenue was driven by a -10% decline in deliveries compounded by a 4.5% decrease in average selling price, which left the homebuilding operating margin down 490 bps but better than expected. The good news is that guidance points to industry normalization and a return to growth.
KB Home had a meaningful improvement in net new orders
The guidance is about as good as it can be. The homebuilding revenue is forecasted to range from $6.4 to $6.8 billion, flat to up 6.25%, and is supported by what the company described as a meaningful improvement in net new orders. Net new orders are up 176% on a volume basis due to lower interest rates, volume and a decline in cancelations. They should remain solid for the foreseeable future, keeping the capital return outlook intact.
The net new orders are below deliveries, which is not good but much better than expected and has positively impacted the backlog. The backlog is down YOY and sequentially, but sequential improvement in new orders helped to offset the 10% increase in deliveries and keep it above 1.5 quarters' worth of business. Assuming new orders remain solid, the backlog should improve sequentially as the year progresses. The latest data from the NAHB shows home builder sentiment bottoming in November of 2023 and the outlook for traffic and future sales improving.
The balance sheet, cash, capital returns and value
KB Homes's cash flow from operations contracted YOY but remained strong and helped substantially improve the balance sheet and shareholder value. The company reports its cash position is more than double last year due primarily to operations. At the end of the quarter, cash was just over $725 million after spending money on share repurchases and the dividend. The dividend yield is small at 1.25% but cheap, with the stock trading at 8.75X earnings, and there is more to the capital return story.
The company repurchased another 3.6 million shares in Q4 for $162 million. This brings the YTD total to over $400 million spent and an 11% decrease in share count. The decline in share count and cash increase helped drive the 15% increase in book value and a 4% gain in shareholder equity. The stock is above book value now, but the recent rally is pricing in another 15% increase or more. Book is above $50, assuming another 15% YOY increase; the stock presents a value when it dips below $58.
The sell-side supports the rally in KB Home
The analyst activity soured in the last quarter of 2023 due to the run-up in share prices. At $63, it is above the consensus midpoint price target and outrun reality. The takeaway is that the consensus price target is on the rise despite the sentiment falling to Hold from Buy, and the freshest targets, which include the highest, see this stock moving up to the $65-$68 region. That’s 3% to 10% above where it is today.
Assuming the analysts don’t cut their targets now, the stock price may dip to a firmer support level where it will present a better value. If that happens, the institutions are likely buyers. The institutional activity was robust in 2024 and bullish on balance every quarter. They own more than 90% of the stock and are not expected to sell in volume due to the 2024 capital return outlook. However, there may be some rotation within the group to drive volatility.
