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Barclays cautious on KB Home stock amid earnings risks and potential margin pressure

EditorEmilio Ghigini
Published 01/14/2025, 05:51 AM

KBH
-0.53%

On Tuesday, Barclays (LON:BARC) analyst revised the price target for KB Home (NYSE:NYSE:KBH) to $60, a decrease from the previous target of $85, while maintaining an Equalweight rating on the stock. According to InvestingPro data, KB Home currently trades at an attractive P/E ratio of 8x, with analyst targets ranging from $65 to $100, suggesting potential upside despite recent market challenges.

Barclays commentary highlighted a performance that, despite falling short of consensus estimates regarding margins and average selling prices (ASPs), may not have been as disappointing as investors feared. This perspective comes in light of order numbers surpassing expectations and a guide-down on gross margin that was not deemed severe.

Barclays analysis suggests that while investors might anticipate a relief rally in KB Home shares in the immediate future, such optimism could be fleeting as the market assesses further risks to the company's financial model in 2025. InvestingPro analysis reveals the company maintains strong financial health with a "GOOD" overall rating, though its stock has experienced a significant 15.3% decline over the past six months.

Notably, management has been actively buying back shares, demonstrating confidence in the company's fundamentals. He expressed caution, considering the potential for overestimation in first-quarter order guidance, the likelihood of increased incentive levels or higher costs impacting gross margin guidance, and the possible erosion of earnings and return on equity (ROE) that could drive KB Home's stock price towards its book value.

The analyst pointed out that while KB Home's focus on affordable price points is favorable, there are concerns about the company's financial outlook. The potential for higher incentive levels and costs that could outpace the company's limited pricing power is particularly worrying, as these factors might contribute to a decline in gross margins and overall profitability.

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Barclays' stance on KB Home remains at Equalweight, indicating a neutral position on the stock's expected performance relative to the market or sector. This rating suggests that the firm's analysts believe the stock will perform in line with the expectations for its industry or the overall market.

In summary, while KB Home's latest results have not been as negative as some might have feared, Barclays warns of potential challenges ahead. The firm advises that the softening market may take time to reflect in builder results, and that the company's stock could face downward pressure as the market comes to terms with these risks.

InvestingPro subscribers can access 8 additional key insights about KB Home, including detailed valuation metrics and growth forecasts. The comprehensive Pro Research Report, available as part of the subscription, provides deep-dive analysis of KB Home's financial health, market position, and future prospects.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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