KB Home (KBH) Down 29.2% YTD: Lower Orders & Higher Rates Ail

KB Home KBH, like other homebuilders, has been reeling under industry-wide challenges like rising mortgage rates and home prices. These are ultimately impacting the affordability of prospective buyers.

Recently, this Los Angeles, CA-based homebuilder reported mixed results in third-quarter fiscal 2022 (ended Aug 31, 2022), with earnings surpassing the Zacks Consensus Estimate and revenues missing the same. On a year-over-year basis, the metrics increased, despite prevailing industry headwinds and moderate housing demand, given the solid backlog level.

Earnings estimates have also shown the inevitable effect of the industry-wide slowdown, decreasing 3.5% for fiscal 2022 and 13.8% for fiscal 2023 over the past seven days. This depicts the analysts’ concern for the company’s growth prospects.

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KBH’s shares have lost 29.2% year to date, underperforming the Zacks Building Products - Home Builders industry’s 35.7% decline this year.

Let’s discuss the factors impacting the performance of this Zacks Rank #5 (Strong Sell) company.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Impacting Performance

Rising Mortgage Rates: The Fed's determination to curtail inflation through interest rate increases and quantitative tightening has started to show the desired effect of slowing down sales in some markets across the country. In September 2022, the Fed approved its third consecutive interest-rate rise of 0.75 percentage points and signaled additional large increases were likely at upcoming meetings as it combats inflation that remains near a 40-year high.

The rate hike brings the central bank’s benchmark interest rate, the federal funds rate, to a new range of 3.0% to 3.25% — its highest level since 2008 — from a range between 2.25% and 2.5%. Officials expect the Fed funds rate to rise to 4.4% by the end of 2022 and 4.6% by the end of 2023. Hence, it is up from 3.4% for this year and 3.8% previously.

Consequently, the highly interest-rate-sensitive housing sector in the United States has been significantly impacted by the rising mortgage rates as the Fed made an aggressive move to bring down the high inflation by lifting borrowing costs. Interest rate hikes, soaring inflation and a smaller bond-buying program are hitting the affordability of the prospective buyers.

Lower Orders: Given lower demand stemming from higher mortgage interest rates, inflation and other macroeconomic and geopolitical concerns, net orders of 2,040 and net order value of $979 million decreased 50% and 51%, respectively, during the fiscal third quarter. Monthly net orders per community were 3.1 compared to 6.6 a year ago. Gross orders decreased 30% year over year to 3,137. The cancelation rate, as a percentage of gross orders, was 35% significantly up from 9%.

Lower Builder Confidence: According to the National Association of Home Builders (NAHB)/Wells Fargo’s Housing Market Index (HMI), sentiment among U.S. homebuilders for newly-built single-family homes slipped to the lowest level since May 2020 in September 2022. However, barring the readings for April and May of 2020 (when HMI fell to 30 and 37, respectively), the September 2022 reading of 46 marks the lowest level since May 2014. High home prices, above 6% mortgage rates and back-to-back interest rate hikes make it difficult for entry-level and first-time buyers to indulge in such activity.

Lower Expected Earnings Growth Rate: For fiscal 2023, the Zacks Consensus Estimate for revenues and earnings is pegged at $6.94 billion and $8.47 per share, reflecting a year-over-year decline of 2.7% and 14.1%, respectively.

Some Better-Ranked Stocks in the Construction Sector

Arcosa, Inc. ACA, currently sporting a Zacks Rank #1, is a manufacturer of infrastructure-related products and services, serving construction, energy and transportation markets.

ACA’s expected earnings growth rate for 2022 is 19.7%. The Zacks Consensus Estimate for current-year earnings has improved to $2.31 per share from $2.08 over the past 30 days.

United Rentals, Inc. URI, presently sporting a Zacks Rank #1, has been benefiting from a broad-based recovery of activity across its end markets served. Higher margins from rental revenues and used equipment sales are added benefits.

The Zacks Consensus Estimate for URI’s 2022 earnings rose to $31.73 per share from $29.70 in the past 60 days. The estimated figure suggests 43.8% year-over-year growth.

Dycom Industries, Inc. DY is benefiting from the higher demand for network bandwidth and mobile broadband, extended geography, proficient program management and network planning services. Dycom expects considerable opportunities across a broad array of customers.

Dycom’s, currently sports a Zacks Rank #1, earnings for fiscal 2023 are expected to grow 142.1%. The Zacks Consensus Estimate for DY’s 2022 earnings rose to $3.68 per share from $3.37 in the past 30 days.

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