KB Home: Initiating Coverage

Business Basics

KB Home’s (KBH) is a mid-sized homebuilder focused primarily on first-time and first move-up buyers but it also has small exposure towards second move-up and active adult communities.

The company follows a build-to-order model to deliver customized home to its customers. This differentiates it from other builders who primarily focus on building a speculative inventory of standardized homes. KB Home provides its customers choice of lot, square footage, floor plan and elevation, and the ability to personalize their future homes in its design studios. This has helped it generate higher absorption (new orders/month/community) compared to its peers.

Source: Company Presentation

The company tries to position its product to target the median household income in each submarket. So, its homes are priced somewhat higher than entry-level builders like LGI Homes or DR Horton but lower than Toll Brothers, etc. [Chart of ASP closing of various home builders arranged in ascending or descending manner]

The Story So Far

Since buying from KB Home requires significant interaction with its design studio staff during customization, its new orders/absorption were impacted more severely versus competitors during the initial phases of lockdown and the stock behaved in line with order trends. However, as the social distancing restrictions are easing and more and more people are getting vaccinated, the company is regaining its momentum. [Chart/absorption data/Current year consensus sales estimate vs 2020,2019]

Last quarter results: KB Home reported $ bn in revenues and

Looking Forward

Margins, simplifying product, excess of q4 guide

Community count

Starts ramping up

Absorptions higher

Double-digit growth in revenues in 22

Delayed recovery

Return focused growth strategy

Forecast and Scenarios

Covid wasn’t all negative for KB Home though. Covid-19 seems to have changed the way consumers view their homes. After spending a significant amount of time indoors, homes are not viewed just as a place where their live, but also a place where they work, their children learn, and their families have a good time. A bit of customization during the buying process can go a long way in terms of quality and comfort they derive from their homes. So, it is likely that build-to-order customized homes may see higher demand from consumers, and KB Home may benefit in the long term.

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