Over the last six months, KB Home’s shares have sunk to $55.88, producing a disappointing 15.8% loss - a stark contrast to the S&P 500’s 13% gain. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
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Why Do We Think KB Home Will Underperform?
Even with the cheaper entry price, we’re passing on KB Home for now. Here are three reasons why KBH doesn’t excite us, plus one stock we’d rather own.
1. Backlog Declines as Orders Drop
We can better understand Home Builders companies by analyzing their backlog. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into KB Home’s future revenue streams.
KB Home’s backlog came in at $2.14 billion in the latest quarter, and it averaged 24.4% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation. 
2. EPS Growth Has Stalled
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
KB Home’s flat EPS over the last five years was below its 2.9% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Unfortunately, KB Home’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We see the value of companies helping their customers, but in the case of KB Home, we’re out. Following the recent decline, the stock trades at 14.7× forward P/E (or $55.88 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. Let us point you toward the most entrenched endpoint security platform on the market.
Stocks We Would Buy Instead of KB Home
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