JPMorgan double downgrades KB Home to underweight, says valuation is too high

KB Home ‘s valuation is too high given its expected future performance, JPMorgan warned. Analyst Michael Rehaut double-downgraded the homebuilder to underweight from overweight. Rehaut cut his price target by $3.50 to $32.50, which implies the stock will fall 9.1% from Friday’s close. The stock’s valuation is currently at 12.5 times its 2023 fiscal year earnings per share outlook and 9.5 times its 2024 fiscal year earnings per share outlook, the analyst said. That’s well above smaller-cap peer averages of 8.5 times and 7 times, he said. Rehaut noted it’s also expensive given that KB Home is expected to trail those smaller-cap competitors on gross margins, operating margins and return on equity. On the three indicators, he said KB Home is expected to come in between 3 and 4 percentage points on each. “We view its valuation … as expensive relative to our outlook for below average gross margins, operating margins and ROE,” he said in a Monday note to clients. The lowered price target can also be attributed to the firm’s move to a 9.5 times earnings estimate for the 2024 fiscal year from the approximately 10.5 times target multiple previously expected. He said the lowered anticipated multiple better reflects the below-average performance expected. However, he does expect 2023 to bring a more steady interest rate environment that could give investors the optimism needed to underwrite a return to normalized sales pacing and gross margins. Builders could also enter a new business cycle in the next few years, he said. Rehaut noted the stock could perform better than expected if it sees stronger-than-expected pricing or easing inflation, which could both help gross margins. Stronger order growth than previously anticipated within its key California and Texas markets could also help the stock, he said, as could a better-than-expected return on equity. More broadly, Rehaut said homebuilders could struggle with fundamentals over the next quarter as the market absorbs the latest increase to mortgage rates, though he said he has a positive outlook for the year as a whole. In addition to his KH Homes downgrade, Rehaut downgraded D.R. Horton to neutral from overweight. However, he upgraded Meritage Homes to overweight from neutral. — CNBC’s Michael Bloom contributed to this report.

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• Source: https://www.cnbc.com/2023/03/06/jpmorgan-double-downgrades-kb-home-to-underweight-says-valuation-is-too-high.html