On Tuesday, JPMorgan analysts revised the price target for KB Home (NYSE: NYSE:) shares, reducing it to $74.50 from the previous $82.00, while maintaining a Neutral stance on the stock. This adjustment follows the homebuilder’s fourth-quarter earnings call and recent guidance updates.
“First, KBH lowered its FY25 housing revenue guidance midpoint by 3%, due to softer demand that the company experienced during the last two months of 4Q24, which has continued into 1Q25,” the analysts said.
Despite this, the company anticipates sales pace for FY25 to align with FY24 levels and expects build times to improve in the first quarter as it aims to achieve a four-month construction target.
The company also addressed the impact of the Los Angeles fires, confirming that all its California divisions, communities, and sales offices are operational. For FY25, KB Home forecasts gross margins to range between 20.0% and 21.0%, a slight decrease from FY24’s 21.1%. The expected year-over-year margin decline is primarily attributed to product mix changes. First-quarter gross margins are projected to be between 20.0% and 20.4%, assuming incentives remain consistent with the fourth quarter of 2024.
In the fourth quarter, KB Home saw orders increase by 41%, surpassing JPMorgan’s estimate of 35% but falling short of the company’s own expectations. The homebuilder managed to maintain base prices and increased incentives without resorting to significant discounting, unlike some competitors. Despite experiencing softer trends at the start of the first quarter, with a 12% year-over-year drop in net orders, KB Home expects order levels for the entire quarter to even out, bolstered by upcoming community openings.
KB Home’s fourth-quarter results revealed an Operating EPS of $2.52, which exceeded both JPMorgan’s estimate of $2.46 and the consensus of $2.44. This outperformance was driven by lower SG&A expenses and higher gross margins. However, the company did face some setbacks, including lower profits from financial services and reduced interest income.
Following these results and the latest guidance, JPMorgan has adjusted its estimates for KB Home’s Operating EPS for FY25 and FY26 to $8.30 and $9.32, respectively, down from previous forecasts of $8.92 and $10.28. The new price target of $74.50 is based on an 8x target multiple against the revised FY26 EPS estimate. This valuation reflects JPMorgan’s market view and fundamental outlook for the homebuilding sector, which anticipates a challenging demand and supply environment in 2025.
The Neutral rating is upheld as KB Home’s valuation is seen as fairly representing the company’s fundamentals relative to its peers, considering its modestly above-average price-to-book ratio, below-average gross and operating margins, and above-average return on equity.
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