The market for KB Homes has now fallen to a new low, institutional backing is still strong and indicates a recovery is imminent. Investors should be aware that a bottom does not necessarily indicate a reversal and that price activity may be limited later in the year.
The corporation forecasts more of the same despite reporting a significant increase in revenue and greater margins, but the specifics are lacking. Price rises, which are ultimately slowing down business growth, are the sole cause of the increases in revenue, margin, and earnings. The company will likely continue to deliver strong profits for the foreseeable future, but significant expansion is not anticipated, which is terrible news in the eyes of the market.
Regarding the institutions and their backing, the sell-side has been net-buying for the past nine quarters and, based on a $29.65 closing price, has added close to 8% of the market cap in the last four quarters. Even though there is some indication of rotation within the group, this brings their total ownership to about 90% and is still increasing. The lesson is that the institutions still believe there is upside in the name, rotation or not, and they should contribute to maintaining the price action in the immediate to short term. Insider trading is also telling; they were selling shares last year, but they stopped doing so in the third quarter of 2021 and haven’t done so since.
Business, revenue, and profit growth for KB Home throughout the quarter led to some adjustments to analyst projections. Consolidated revenue for the company was $1.72 billion, up 19.4% from the prior year. The revenue also exceeded expectations by 366 basis points, but now the good news turns bad. The increase in revenue is entirely attributable to a 21% rise in average selling price, which was partially offset by a little reduction in volume. Wider margins at the operating and gross levels as a result of the higher selling price also led to an oversized impact on the bottom line. The company’s GAAP earnings were $2.32, up 54 percent from the prior year and $0.27 higher than expectations.
Regarding the forecast, the company anticipates strength to persist through the year’s conclusion, boosted once more by rising prices. The company projects net 2022 sales of $7.3 to $7.5 billion, driven by an increase in the average selling price of 115 basis points. The conclusion is that growth is predicted to be between just 29% and 29% at the top end of the range, indicating that growth is slowing and that there is a risk to the downside of the projections. Activity is being severely impacted by the rise in property prices and mortgage rates, and this trend will get worse as the Fed hikes rates. The analysts’ price objective for the company is $42.75, though, as they continue to see upside potential. The consensus is moving up after the release, and that objective is around 45 percent above the price action right now.