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." 

Also Read: KBH Downgraded: Goldman Sachs Points Out Spike In Cancellation Rates And Debt Concerns

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.

Related: Analyst Upgrades Homebuilders In Anticipation Of A Credit Catalyst Amid Recession Fears

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

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