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Category: KB Home (KBH)
Date: 13 January 2021 Stock price of KB Home (KBH): $34.15 We take a look at the 4th quarter 2020 earnings report of KB Home (KBH), one of the largest and most recognized homebuilders in the United States and has been building quality homes for over 60 years. Today, KB Home operates in 45 markets across eight states, serving a wide array of buyer groups. For the 4th quarter 2020 the group reported revenues of $1.19 billion and net income of $106 million.
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We had a strong finish to this extraordinary year, particularly with the 42% year-over-year increase in our fourth quarter net orders - Jeffrey Mezger, Chairman, President and Chief Executive Officer "
More About KB Home
KB Home (NYSE: KBH) is one of the largest and most recognized homebuilders in the United States and has been building quality homes for over 60 years. Today, KB Home operates in 45 markets across eight states, serving a wide array of buyer groups. What sets us apart is how we give our customers the ability to personalize their homes from homesites and floor plans to cabinets and countertops, at a price that fits their budget. We are the first builder to make every home we build ENERGY STAR® certified. In fact, we go beyond the EPA requirements by ensuring every ENERGY STAR certified KB home has been tested and verified by a third-party inspector to meet the EPA’s strict certification standards, which helps lower the cost of ownership and to make our new homes healthier and more comfortable than new ones without certification. We also work with our customers every step of the way, building strong personal relationships so they have a real partner in the homebuying process, and the experience is as simple and easy as possible
Overview of KB Home (KBH) 4th quarter 2020 earnings report
Three Months Ended November 30, 2020 (comparisons on a year-over-year basis)
- Revenues totaled $1.19 billion, down 23% from $1.56 billion, reflecting the negative impact the COVID-19 pandemic had on the Company’s operations, particularly its net orders and housing starts, in the second quarter.
- Homes delivered were 2,876, compared to 3,929.
- Average selling price increased 5% to $413,700.
- Homebuilding operating income totaled $115.7 million, compared to $162.5 million. The homebuilding operating income margin decreased 80 basis points to 9.7%. Excluding inventory-related charges of $11.7 million in the current quarter and $4.1 million in the year-earlier quarter, this metric was flat at 10.7%.
- The housing gross profit margin expanded 40 basis points to 20.0%. Excluding inventory-related charges, the housing gross profit margin increased 110 basis points to 21.0%.
- The housing gross profit margin improvement primarily reflected a favorable pricing environment due to the strength of housing market demand, shifts in the geographic and product mix of homes delivered and lower amortization of previously capitalized interest.
- Adjusted housing gross profit margin, a metric that excludes inventory-related charges and the amortization of previously capitalized interest, increased to 24.0% from 23.1%.
- Selling, general and administrative expenses as a percentage of housing revenues increased to 10.3% from 9.1%, primarily due to decreased operating leverage from lower housing revenues, partly offset by the Company’s targeted actions to reduce overhead costs.
- The housing gross profit margin expanded 40 basis points to 20.0%. Excluding inventory-related charges, the housing gross profit margin increased 110 basis points to 21.0%.
- The Company’s financial services operations generated pretax income of $9.5 million, up from $9.3 million, mainly reflecting higher income from its mortgage banking joint venture, KBHS Home Loans, LLC.
- KBHS Home Loans, LLC originated 81% of the residential mortgage loans the Company’s homebuyers obtained to finance their home purchase, compared to 74%.
- Total pretax income decreased to $126.1 million from $165.0 million, reflecting the effects from pandemic-related disruptions on the Company’s operations earlier in the year. As a percentage of revenues, pretax income was even with the year-earlier quarter at 10.6%.
- Excluding the above-mentioned inventory-related charges in both periods and a $6.8 million charge for the early extinguishment of debt in the 2019 fourth quarter, pretax income as a percentage of revenues increased 20 basis points to 11.5% from 11.3%.
- The Company‘s income tax expense and effective tax rate were $20.0 million and approximately 16%, respectively. In the year-earlier quarter, income tax expense was $41.8 million and the effective tax rate was approximately 25%. The lower effective tax rate in the current quarter primarily reflected the favorable impacts of federal energy tax credits and excess tax benefits from stock-based compensation.
- Net income and diluted earnings per share were $106.1 million and $1.12, respectively, compared to net income of $123.2 million and diluted earnings per share of $1.31.
KB Home management commentary 4th quarter 2020 earnings report
LOS ANGELES--(BUSINESS WIRE)-- KB Home (NYSE: KBH) today reported results for its fourth quarter and year ended November 30, 2020.
“We had a strong finish to this extraordinary year, particularly with the 42% year-over-year increase in our fourth quarter net orders,” said Jeffrey Mezger, Chairman, President and Chief Executive Officer. “Housing market conditions continue to be robust, as the pandemic has helped propel demand for homeownership, accentuating all the financial, health, safety and emotional benefits it offers. This fundamental shift has long been anticipated — with pent-up demographic forces, a housing supply shortage, and favorable mortgage interest rates — and COVID-19 has accelerated these dynamics. In addition to generating strong net order growth, we also expanded our gross margin in the fourth quarter to 21%, excluding inventory-related charges, a level that we believe we can sustain for our 2021 fiscal year.”
“With the substantial increase in our backlog, we enter the new year well positioned to both expand our scale and deliver that growth at superior margins. Our favorable outlook is supported by the composition of our backlog, a strong line-up of planned community openings, and a leaner, more efficient operation. Most notably, we expect meaningfully higher revenue and earnings in 2021 to drive significant expansion of our return on equity.”
“We had a strong finish to this extraordinary year, particularly with the 42% year-over-year increase in our fourth quarter net orders,” said Jeffrey Mezger, Chairman, President and Chief Executive Officer. “Housing market conditions continue to be robust, as the pandemic has helped propel demand for homeownership, accentuating all the financial, health, safety and emotional benefits it offers. This fundamental shift has long been anticipated — with pent-up demographic forces, a housing supply shortage, and favorable mortgage interest rates — and COVID-19 has accelerated these dynamics. In addition to generating strong net order growth, we also expanded our gross margin in the fourth quarter to 21%, excluding inventory-related charges, a level that we believe we can sustain for our 2021 fiscal year.”
“With the substantial increase in our backlog, we enter the new year well positioned to both expand our scale and deliver that growth at superior margins. Our favorable outlook is supported by the composition of our backlog, a strong line-up of planned community openings, and a leaner, more efficient operation. Most notably, we expect meaningfully higher revenue and earnings in 2021 to drive significant expansion of our return on equity.”
COVID-19 Impact on 2020 Fourth Quarter Results and 2021 Outlook
The COVID-19 pandemic and related governmental control measures severely disrupted global and national economies, the U.S. housing market and the Company’s business during its 2020 second quarter. During this period, the Company experienced a sizable reduction in its net orders and backlog, protracted supply chain delays and construction cycle time extensions in most of its served markets. With the easing to varying degrees of restrictive public health orders in its served markets beginning in May, the Company’s net orders began to rebound significantly following a low point in April as housing demand fueled by the combination of historically low mortgage interest rates, a limited supply of resale inventory and consumers’ increasing desire to own a single-family home drove the Company’s third- and fourth-quarter net orders to 15-year highs. Though this sharp rise in net orders in the second half generated a substantial expansion in backlog, and positioned the Company for considerable top-line and bottom-line growth next year, the Company’s deliveries, revenues and profits for the 2020 fourth quarter reflected the negative effects from the early stages of the pandemic.
During the 2020 second quarter and most of the third quarter, in prioritizing cash preservation and liquidity in light of lingering uncertainty surrounding the COVID-19 pandemic, the Company limited its investments in land and land development, resulting in a 24% year-over-year decrease in those quarters combined. Together with the Company’s close-out of communities earlier than planned due to an accelerated, demand-driven net order pace, and delays in community openings due in part to pandemic-related issues, the Company’s ending community count for the fourth quarter decreased year over year.
With the sustained strong housing demand over the 2020 second half, the Company has intensified its land acquisition and development investments to measurably expand its lot pipeline and support future community count growth. In the fourth quarter, the Company increased its investments by 63% from the year-earlier quarter and, as a result, anticipates positive year-over-year community count comparisons beginning in the 2021 second half to drive an increase in community count for the year. In addition, with its ending backlog value up a robust 63% from a year ago, representing potential future revenues of approximately $2.96 billion, its highest level since 2005, the Company expects to achieve significant growth in its scale and profits in 2021. However, this favorable outlook could be affected materially by developments related to the COVID-19 pandemic, including new or more restrictive “stay-at-home” orders and other new or revised public health requirements recommended or imposed by federal, state and local authorities. Until the COVID-19 pandemic has been resolved as a public health crisis, it retains the potential to cause further and more severe disruption of global and national economies, the U.S. housing market and the Company’s business, including the Company’s net orders, backlog and revenues.
The COVID-19 pandemic and related governmental control measures severely disrupted global and national economies, the U.S. housing market and the Company’s business during its 2020 second quarter. During this period, the Company experienced a sizable reduction in its net orders and backlog, protracted supply chain delays and construction cycle time extensions in most of its served markets. With the easing to varying degrees of restrictive public health orders in its served markets beginning in May, the Company’s net orders began to rebound significantly following a low point in April as housing demand fueled by the combination of historically low mortgage interest rates, a limited supply of resale inventory and consumers’ increasing desire to own a single-family home drove the Company’s third- and fourth-quarter net orders to 15-year highs. Though this sharp rise in net orders in the second half generated a substantial expansion in backlog, and positioned the Company for considerable top-line and bottom-line growth next year, the Company’s deliveries, revenues and profits for the 2020 fourth quarter reflected the negative effects from the early stages of the pandemic.
During the 2020 second quarter and most of the third quarter, in prioritizing cash preservation and liquidity in light of lingering uncertainty surrounding the COVID-19 pandemic, the Company limited its investments in land and land development, resulting in a 24% year-over-year decrease in those quarters combined. Together with the Company’s close-out of communities earlier than planned due to an accelerated, demand-driven net order pace, and delays in community openings due in part to pandemic-related issues, the Company’s ending community count for the fourth quarter decreased year over year.
With the sustained strong housing demand over the 2020 second half, the Company has intensified its land acquisition and development investments to measurably expand its lot pipeline and support future community count growth. In the fourth quarter, the Company increased its investments by 63% from the year-earlier quarter and, as a result, anticipates positive year-over-year community count comparisons beginning in the 2021 second half to drive an increase in community count for the year. In addition, with its ending backlog value up a robust 63% from a year ago, representing potential future revenues of approximately $2.96 billion, its highest level since 2005, the Company expects to achieve significant growth in its scale and profits in 2021. However, this favorable outlook could be affected materially by developments related to the COVID-19 pandemic, including new or more restrictive “stay-at-home” orders and other new or revised public health requirements recommended or imposed by federal, state and local authorities. Until the COVID-19 pandemic has been resolved as a public health crisis, it retains the potential to cause further and more severe disruption of global and national economies, the U.S. housing market and the Company’s business, including the Company’s net orders, backlog and revenues.
KB Home (KHB) stock price chart over the last 5 years
The image below shows the stock price history of KB Home (KBH) over the last 5 years. And its been a good time for KB Home stockholders with the stock increasing by 71.50% over the last 5 years. Pretty decent returns most investors would be happy with.
The stock of KB Home is trading at closer to its 52 week high than it is to its 52 week low which is a clear indication that the short term sentiment and momentum of KB Home stock is positive at this point.
The stock of KB Home is trading at closer to its 52 week high than it is to its 52 week low which is a clear indication that the short term sentiment and momentum of KB Home stock is positive at this point.
Latest stock valuation of KB Home (KBH)
So what is KB Home (KBH) stock worth based on their 4th quarter 2020 earnings report? Based on their earnings report our valuation model provides a target price (full value price) for KB Home at $48.70 a stock.
We therefore believe the stock of KB Home is undervalued at its current price of $34.15
We usually recommend long term fundamental or value investors look to enter a stock at least 10% below our target price (full value price), which in this case is $204.80, thus a good entry point into KB Home would be at $30.8 or below.
We expect the stock of KB Home to kick up from current levels in coming weeks and months to levels closer to our target price (full value price), as their stock is price is undervalued. We rate the stock of KB Home as a buy.
We therefore believe the stock of KB Home is undervalued at its current price of $34.15
We usually recommend long term fundamental or value investors look to enter a stock at least 10% below our target price (full value price), which in this case is $204.80, thus a good entry point into KB Home would be at $30.8 or below.
We expect the stock of KB Home to kick up from current levels in coming weeks and months to levels closer to our target price (full value price), as their stock is price is undervalued. We rate the stock of KB Home as a buy.
Next earnings release of KB Home
It is expected that KB Home will release their 1st quarter 2021 earnings report in early April 2021