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On Thursday, BTIG maintained a Neutral rating on KB Home (NYSE:KBH) following the company's third-quarter earnings report. KB Home disclosed earnings per share (EPS) of $2.04, which fell short of BTIG's estimate of $2.10 and consensus expectations of $2.07.
The lower-than-anticipated results were attributed to reduced gross margins and average selling prices, partially mitigated by a decreased sales, general and administrative (SG&A) expenses to sales ratio and higher-than-expected home deliveries. Despite a minor dip in unit orders, the homebuilder observed an uptick in demand throughout the quarter, with September sales described as "solid."
KB Home exercised caution, noting that potential buyers are still hesitant, wary of committing to purchases with the possibility of interest rates falling further. The company's fourth-quarter guidance was modestly below expectations, factoring in anticipated lower gross margins and a higher tax rate. Consequently, BTIG adjusted its full-year 2024 EPS estimate for KB Home downward to $8.43 from the previous $8.55.
Looking forward, KB Home has set a revenue goal of $7.5 billion for fiscal year 2025, which exceeds BTIG's former projection of $6.6 billion. Achieving this target may require KB Home to significantly increase its number of stores, average selling prices, and/or backlog conversion rates. BTIG is skeptical about a meaningful uptick in absorption rates if the product mix reverts to an 80/20 build-to-order (BTO) to speculative (spec) ratio as management indicated. Nevertheless, the firm raised its FY25 EPS estimate for KB Home to $8.95 from $8.60, assuming improved revenues but a lower operating margin than previously estimated.
The normalization of supply chains has reinvigorated the BTO model as a feasible option for consumers. However, BTIG suggests that in the entry-level market, companies that focus on scale efficiency and high-margin speculative building are likely to see better returns. KB Home's commitment to the BTO model and its ambitious revenue targets for FY25 are noted, yet BTIG's outlook on the stock remains cautiously neutral.
In other recent news, KB Home delivered a robust financial performance in the third quarter of fiscal 2024, with revenues exceeding $1.75 billion and diluted earnings per share hitting $2.04. The company reported a steady number of net orders at 3,085 and maintained a stable cancellation rate, reflecting strong market demand.
KB Home's significant investment in land acquisition and development, coupled with a comprehensive share repurchase program, underscores its optimism for the future, projecting revenues of approximately $7.5 billion for fiscal 2025.
Despite a slight dip in gross margins and a 15% year-over-year decrease in backlog, the company saw an 8% increase in home deliveries and a 3% rise in the average selling price, reaching approximately $481,000. KB Home's management is committed to balancing growth investments with shareholder returns, maintaining a healthy liquidity position of $1.46 billion.
InvestingPro Insights
KB Home (NYSE:KBH) has demonstrated a mix of financial resilience and challenges according to the latest InvestingPro data. With a market capitalization of $6.24 billion and a P/E ratio of 10.71, the company trades at a reasonable valuation relative to its earnings. Notably, the adjusted P/E ratio for the last twelve months as of Q3 2024 stands at a slightly lower 9.87, which suggests a modest improvement in earnings relative to share price. Despite a slight revenue decline of 1.09% over the last twelve months as of Q3 2024, KB Home managed to maintain a gross profit margin of 21.69%, indicating a strong ability to control costs and maintain profitability.
InvestingPro Tips highlight that management has been proactively buying back shares and analysts have revised their earnings upwards for the upcoming period, signaling confidence in the company's financial strategy and future performance. Furthermore, the company has maintained dividend payments for 39 consecutive years, with a notable dividend growth of 25.0% over the last twelve months as of Q3 2024, showcasing its commitment to shareholder returns. For investors seeking additional insights, there are over 12 more InvestingPro Tips available on KB Home's profile at https://www.investing.com/pro/KBH, offering a comprehensive view of the company's financial health and market potential.
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