KB Home’s stock price has taken a beating over the past six months, shedding 23.5% of its value and falling to $49.20 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in KB Home, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think KB Home Will Underperform?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why KBH doesn't excite us and a stock we'd rather own.
1. Backlog Declines as Orders Drop
In addition to reported revenue, backlog is a useful data point for analyzing Home Builders companies. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into KB Home’s future revenue streams.
KB Home’s backlog came in at $1.70 billion in the latest quarter, and it averaged 28% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation.
2. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for KB Home, its EPS declined by more than its revenue over the last two years, dropping 13.4%. This tells us the company struggled to adjust to shrinking demand.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, KB Home’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We see the value of companies helping their customers, but in the case of KB Home, we’re out. Following the recent decline, the stock trades at 14.4× forward P/E (or $49.20 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better investments elsewhere. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
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