Soaring Home Prices Might Slam Builders. Why an Analyst Thinks This Stock Is Still a Buy.

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KB Home stock advanced over 30% in 2021.

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An analyst at RBC Capital Markets says builders are in for a “roller coaster year” as affordability issues weigh on home buyers. But KB Home,
The analyst noted that other builders who underperformed last year could be a smart buy now.

RBC’s Mike Dahl on Monday upgraded shares of California-based builder (ticker: KBH) from sector perform to outperform and lowered his price target from $50 to $46. The new target represents an increase of 16% from recent prices of $41, but is below the Wall Street average target of $52.33.

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The upgrade comes ahead of KB Home’s fourth-quarter and full-year earnings release, which are due after the market closes on Wednesday. Consensus estimates gathered by FactSet expect the company’s earnings for the fourth quarter to be $1.77 on $1.72 billion in sales and full-year earnings of $5.89 per share on $5.76 billion in sales.

Analysts say KB Home could outperform its peers last year despite the odds. Shares rose 33% in 2021, better than the S&P 500’s 27% gain but less than 50%-plus gains from DR Horton (DHI) and Lenar (LEN). Dahl credits the underperformance for cautioning investors about KB Homes’ build-to-order business model, which he says led to slower growth in gross margins than builders who built homes before orders. Is. Dahl writes, “We believe these concerns have escalated and view this as a time delay and not as a structural flaw in the business of KBH.”

Note the busy spring also precedes home-buying season. Housing demand will be stronger this spring, Dahl forecasts. But there will also be home-value appreciation, which can be combined with higher mortgage rates to weigh on buyers’ wallets. The National Association of Realtors expects 30-year fixed mortgage rates to rise from 3.7% to 3.7% at the end of the year, while a consensus estimate collected by the trade group projects a 5.7% increase in home prices in 2022. is estimated. The sale price trade group recently said the average current home was $353,900 in November.

“Ultimately we expect deteriorating affordability to drive demand given the already elevated starting point in key markets,” the analyst wrote of the builders.

For those reasons, Dahl cut other builders’ price targets by an average of 3%. The RBC analyst downgraded Toll Brothers (TOL) from outperform to outperform sector, citing its strong 2021 performance and some upcoming catalysts.

KB Home stock rose 3.4% on Monday, outperforming big builders DR Horton, Lennar, NVR (NVR), and PulteGroup (PHM). Those stocks closed about 1% higher.

Write to Shaina Mishkin at [email protected]

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