Summary
- KB Home’s build-to-order approach facing headwinds in Covid-19 world and its net order growth is lagging peers.
- However, as Covid-19 fear wanes over the next 12 to 18 months and homebuyers look for more customization the company may outperform its peers.
- The company has delivered good results over the past couple of years through its returns-focused growth plan.
- The stock can see a good upside if its price to tangible book value multiple returns to pre-Covid-19 levels.
KB Home (KBH) is an entry level homebuilder with ~55% of its deliveries to first-time home buyers, ~22% of its deliveries to first move-up buyers and rest 23% to second move-up and active adult buyers combined.
Recent Underperformance
While most of the homebuilders are making new highs post Covid-19 and entry level homebuilders are outperforming the industry, KB Home is still trading ~11% below its February 2020 highs. The company reported an impressive net order growth for July at 23%, but it was still much lower than over 50% yoy growth which other entry level homebuilders like Meritage Homes (MTH), DR Horton (DHI) are reporting. Hence, its stock price is lagging its peers.
The key reason behind this underperformance is the company’s Built-to-Order™ approach. KB Home provides each of its homebuyers with a highly personalized experience where they can make a wide range of structural and design choices for their future new home. The company’s sales representatives, design consultants and other personnel partner closely with each homebuyer through each major step in the design, construction and closing of their home. This is different from most of the other public homebuilders, especially at the entry level, which provide limited choices to the buyers and have turned their focus on building speculative inventory in order to serve the current resurgence in demand.
With most of the consumers still following social distancing measures, any buying process which involves a lot of physical interaction will face headwinds. So, KB Home’s new bookings are underperforming. While this may continue in the short term, I believe the gap between KB Home’s performance and other builders will likely narrow as the coronavirus fear slowly subsides. KB Home’s net orders have already improved from -55% in May to +11% in June and +23% in July. The major breakthrough will of course come sometime next year with the launch of Covid-19 vaccine (if any of the current trial candidates are successful). So, if one is looking for an investment horizon of 12 months to 18 months, the stock makes a good sense.
