KB Home Faces Downgrade Amid Increasing Market Competition And Price Cuts; Analyst Slashes Estimates

Wedbush analyst Jay McCanless downgraded KB Home KBH to Neutral from Outperform and maintained the price target of $55.

The analyst's re-rating reflects a more competitive environment in 4Q23.

McCanless notes the National Association of Homebuilders (NAHB) economist commentary, "In November, 36% of builders reported cutting home prices, up from 32% in the previous two months. This is the highest share of builders cutting prices during this cycle, tying the previous high point set in November 2022." 

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Although the analyst reaffirmed KBH's FY23 and FY24 order and closing volume estimates, he anticipates more downside than upside risk to those estimates.

Consequently, the analyst cut EPS estimates to $6.91 (from $7.03) for FY23 and $7.15 (from $7.83) for FY24, with the Q4 gross margin estimate reduced to 20.5% (vs. the prior estimate of 21.2%). 

For FY24, the analyst trimmed the gross margin estimate to 20.5% from 21.6%, assuming competitive discounting on spec homes and mortgage rate buydowns to drive orders in Q4 FY23 and Q1 FY24, which could have a negative gross margin impact on FY24 closings. 

The analyst continues to project FY24 revenue of $6.8 billion, in line with KBH's guidance.

In September, KBH reported a third-quarter FY23 sales decline of 13.9% year-on-year to $1.59 billion, beating the analyst consensus of $1.48 billion and EPS of $1.80, beating the analyst consensus of $1.43.

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Price Action: KBH shares are trading down 1.15% at $53.25 on the last check Monday.

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