KB Home (KBH) Returns-Focused Growth Plan Aid Amid Supply Woes

KB Home KBH remains well poised for 2022 and beyond, given its continuous focus on the Returns-Focused Growth plan. Also, robust housing demand and a favorable pricing environment add to the bliss.

Yet, higher costs associated with performance-based employee compensation plans, and supply-chain disruptions and labor shortages are major concerns.

Growth Drivers

Returns-Focused Growth Plan: Since 2016, KB Home has been pursuing a Returns-Focused Growth Plan that is designed to drive revenues, homebuilding operating income margin, return on invested capital, return on equity and leverage ratio. KB Home is now in a better position to expect meaningful growth in fiscal 2022, attributable to an increase in backlog and its ability to match housing starts to net orders. The company is executing its plan to expand the scale of operations while driving both margins and returns.

Looking ahead to 2022, KB Home expects another year of profitable growth, with a sizable increase in the backlog value and community count. The company’s fiscal 2021-end stockholders’ equity was $3.02 billion compared with $2.67 billion a year ago and book value per share increased 18% to $34.23. A major improvement in return on equity or ROE is encouraging. ROE was 19.9% for fiscal 2021, which marked a year-over-year expansion of more than 800 bps. Given the current backlog level, community opening plans and the expected housing market strength, KB Home expects to register a significant year-over-year improvement in key 2022 financial metrics.

Built-to-Order Approach: This highly consumer-centric approach helps homebuyers design a home with the features and amenities of their choice. Not only has this approach given KB Home a competitive advantage over its peers, it has led to low-cost production.

The company follows a strategy of initiating construction only after a purchase agreement has been executed. This reduces inventory risk, enhances efficiencies in construction and provides greater visibility as well as predictability on future deliveries. KBH’s built-to-order homes help it generate higher revenues from premiums (lots, plans, and elevations) as well as design studio and structural options.

Land Acquisition Strategy: The company invests aggressively in land acquisition and development, which is critical for community count as well as top-line growth. In fiscal 2021, it invested $2.5 billion in land acquisitions and development.

Headwinds

Supply-Chain Woes: KB Home, similar to any other industry players such as Lennar LEN, D.R Horton DHI and PulteGroup PHM, has been witnessing challenges related to raw material shortages and municipal delays. Raw material inflation is eating into homebuilders’ margins. Although KB Home has been navigating the challenges associated with supply shortages well, these headwinds are serious threats to the company’s margins.

Labor Shortage: Higher labor costs are threatening margins, as they limit homebuilders’ pricing power. Labor shortages are resulting in higher wages and delays in construction, which eventually hurt the number of homes delivered. Also, land prices are increasing due to limited availability. This is somewhat exerting pressure on homebuilders’ margins, considering that home prices are moderately increasing.

Higher Mortgage Rates: It is to be noted that the Federal Reserve expects to raise interest rates three times in 2022 as it exits from the policies enacted at the start of the health crisis. Interest rate hikes, soaring inflation and a smaller bond-buying program are pointing to higher mortgage rates in 2022. This may discourage potential buyers to some extent.

A Brief Overview of the Above-Mentioned Stocks

Lennar: This homebuilder has been benefiting from effective cost control and focus on making its homebuilding platform more efficient, which, in turn, is resulting in higher operating leverage. Focus on the lighter land strategy to boost free cash flow will bolster the balance sheet and thereby drive returns for LEN.

D.R Horton: This company’s industry-leading market share, solid acquisition strategy, well-stocked supply of land, lots and homes along with affordable product offerings across multiple brands will drive growth. Yet, continued supply-chain issues, material cost inflation and higher wage are concerns for DHI.

PulteGroup: PulteGroup’s annual land acquisition strategies have been resulting in improved volumes, revenues and profitability for quite some time now. The company has been reaping benefits from the successful execution of strategic initiatives to boost profitability, with a focus on entry-level homes.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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