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KB Home (KBH) Strong on Positive Housing Market Scenario

On Aug 14, we issued an updated research report on KB Home KBH – one of the largest homebuilders in the U.S.

We appreciate the company’s strategy to boost scale in existing geographic footprint, improve profitability per unit, generate higher operating margin and drive earnings, while simultaneously generating positive cash flow to invest in growth and debt reduction.

The company’s first half of fiscal 2017 results show an impressive 22% growth in revenues and a double-digit increase in deliveries and housing revenues along with 58% surge in profits. Strong orders in value (up 21.8%) and backlog (up 19%) in the first half also bode well.

What’s Driving KB Home?

We are encouraged by the company’s KB2020 business strategy which aims to boost scale in existing geographic footprint, improve profitability per unit, generate higher operating margin, drive earnings while generating positive cash flow to redeploy for growth and debt reduction.

The company invests aggressively in land acquisition and development, mainly in high-end locations, which is critical for community count as well as top-line growth. In the first six months of fiscal 2017, to drive future community openings, the company had invested $706.6 million in land and land development. This compares with $702.6 million in the first six months of fiscal 2016. Of the total investments made in the first half of 2017, 48% was related to land acquisition.

With the overall macro environment looking strong, housing demand is expected to rise further, thus boosting profits for homebuilders like NVR, Inc. NVR, M/I Homes, Inc. MHO and Meritage Corporation MTH. Steady job and wage growth, a recovering economy, moderating home price gains, historically low interest/mortgage rates, rising rentals, rapidly increasing household formation and a limited supply of inventory — all point to continually strong demand in 2017.

Labor and Land Costs Threat Margins

Rising labor costs are threatening margins as they limit homebuilders’ pricing power. Labor shortages are leading to higher wages and delays in construction, which eventually hurt the number of homes delivered.  Also, land prices are rising due to limited availability which might lead to increased inflation. This is in turn denting margins for homebuilders.

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KB Home (KBH): Free Stock Analysis Report
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M/I Homes, Inc. (MHO): Free Stock Analysis Report
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