Key insights
- KB Home (KBH) trades at a seemingly low P/E of 9.6x, but a deeper dive into filings reveals concerning forward guidance. The company projects a ~20% volume decrease by 2026 from its 2024 peak, with gross margins expected to fall from 20% to ~15%. Declining net order value and potential land deposit risks further cloud the outlook. While KBH has a decade of profitability, normalizing earnings suggests a higher P/E. The book value, largely illiquid assets, also raises concerns about the true margin of
$KBH trades at 9.6x trailing earnings and 0.85x book value. This at least looked somewhat promising so I went through their recent filings, the forward picture leaves something to be desired:
- 2026 delivery guidance implies volume down ~20% from 2024 peak
- Gross margin guidance of ~15%, down from 20% in 2024
- Net order value declining
- Land deposits at risk if they need to walk away from optioned lots
If you normalize earnings to a more typical environment, the P/E jumps significantly. Which leaves us with this conundrum: is 9.6x cheap relative to what the business actually earns or cheap relative to a recent downfall of bad luck? (It's a trap!) I looked to my Jedi Master Graham for answers. His response to this problem was to look at 10 years of earnings history. One or two exceptional years, good or bad, is fluff. KBH has been profitable for a decade and assuming rates start to give a little in the near future management should be able to weather this storm.
The book value story is also a little concerning. $KBH's book value is primarily land, work-in-progress homes, and finished inventory. None of this is liquid, we can't sell it for what they are claiming its worth (at least not right now). The net current asset value protection is built on the idea that you could realize those assets in a wind-down. I don't think we will get full value for half built subdivisions but what is the Space X IPO going for again?
I feel $KBH deserved a watch this month. Not because the company is bad but because I'm not confident the margin of safety is real once you look past the first blush metrics.