Soaring Home Prices Might Slam Builders. Why an Analyst Thinks This Stock Is Still a Buy.
KB Home stock advanced more than 30% in 2021.
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Builders are in for a “roller coaster year” as affordability issues weigh on home buyers, an RBC Capital Markets analyst says. But KB Home , which underperformed other builders last year, could be a smart buy now, the analyst notes.
RBC’s Mike Dahl upgraded shares of the California-based builder (ticker: KBH
) to Outperform from Sector Perform on Monday and lowered his price target to $46 from $50. The new target implies a 16% upside from recent prices of $41 but is below the average Wall Street target of $52.33.
The upgrade comes ahead of KB Home’s fourth quarter and full-year earnings release, which are due Wednesday after the market close. Consensus estimates gathered by FactSet foresee earnings of $1.77 per share on $1.72 billion in sales for the company’s fourth quarter, and full-year earnings of $5.89 per share on sales of $5.76 billion.
Despite headwinds, KB Home could outperform its peers after lagging behind them last year, the analyst says. Shares rose 33% in 2021, better than the S&P 500‘s 27% gain but less than the 50%-plus gains from D.R. Horton ( DHI
) and Lennar ( LEN
). Dahl attributes that underperformance to investor caution about KB Homes’ build-to-order business model, which he says led to a slower increase in gross margins than builders who construct homes in advance of an order. “We believe these concerns are overblown and see this more as a timing delay and not a structural flaw in KBH’s business,” Dahl writes.
The note also comes ahead of the busy spring home-buying season. Housing demand this spring will be strong, Dahl forecasts. But so will home-price appreciation, which could combine with higher mortgage rates to weigh on would-be buyers’ wallets. The National Association of Realtors expects 30-year fixed mortgage rates to end the year at 3.7%, up from a recent 3.2%, while a consensus estimate collected by the trade group forecasts a 5.7% rise in home prices in 2022. The sales price of the median existing home was $353,900 in November, the trade group recently said.
“Ultimately we expect worsening affordability to drive moderating demand given an already-stretched starting point across key markets,” the analyst wrote about the builders.
For those reasons, Dahl cut the price targets of other builders he covers by an average of 3%. The RBC analyst also downgraded Toll Brothers ( TOL
) to Sector Perform from Outperform, citing its strong 2021 performance and few coming catalysts.
KB Home stock gained 3.4% Monday, beating the performance of large builders D.R. Horton, Lennar, NVR ( NVR
), and PulteGroup ( PHM
). Those stocks closed around 1% higher.
Write to Shaina Mishkin at [email protected]
