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A Bull Vs. Bear Take On KB Homes Following Q3 Earnings

A Bull Vs. Bear Take On KB Homes Following Q3 Earnings

KB Home (NYSE: KBH) is subject to ongoing investor debate on the merits of buying or avoiding the stock.

The company reported fiscal third-quarter results that prompted one Street analyst to turn incrementally bullish while another remains convinced investors should stick to the sidelines.

The Bull Argument: The bullish case for KB Home's stock is based on a strong earnings report that signaled "robust" new home demand, Raymond James analyst Buck Horne wrote in a note. Specifically, net order growth accelerated each month in the quarter, and overall net order growth of 27% year-over-year beat expectations of 27%.

KB Home's report also showed absorption rates hitting the highest levels in more than 10 years and the company is pushing prices higher to mitigate potential future cost inflation.

See Also: Encouraged By Robust Recovery, Housing Market Demand: KB Home CEO

Management noted it's seeing higher demand from millennials and first-time buyers along with strong preferences for build-to-home orders, and higher dollar spend on design upgrades.

The stock is among the "sector's most attractive" but investors should be mindful of potential headwinds, including delayed new community openings and slowing construction cycle times that resulted in a weaker-than-expected fiscal fourth-quarter guidance.

Horne has a Strong Buy rating on KB Home's stock with a price target of $48.

The Bear Argument: KB Home's guidance was "disappointing" as it implies a notable decrease in backlog conversion rate and reflects the company's decision to notably curtailing operations in the fiscal second quarter, BTIG analysts wrote in a note. As such, orders taken in the recently reported quarter are unlikely to close as quickly.

The company's build-to-order selling proposition could also translate to extended cycle times and the inability to offset future cost input inflation.

Nevertheless, management's fiscal fourth-quarter guidance does have a "fair amount of conservatism" built-in, the analysts wrote.

Latest Ratings for KBH

Sep 2020B of A SecuritiesMaintainsBuy
Sep 2020Credit SuisseMaintainsOutperform
Sep 2020Raymond JamesMaintainsStrong Buy

View More Analyst Ratings for KBH
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