KB Home (KBH)

Homebuilder KB Home (NYSE:KBH) beat Wall Street’s revenue expectations in Q2 CY2025, but sales fell by 10.5% year on year to $1.53 billion. On the other hand, the company’s full-year revenue guidance of $6.4 billion at the midpoint came in 2.4% below analysts’ estimates. Its GAAP profit of $1.50 per share was 1.7% above analysts’ consensus estimates.

Company Overview

The first homebuilder to be listed on the NYSE, KB Home (NYSE:KB) is a homebuilding company targeting the first-time home buyer and move-up buyer markets.

Traditionally, homebuilders have built competitive advantages with economies of scale that lead to advantaged purchasing and brand recognition among consumers. Aesthetic trends have always been important in the space, but more recently, energy efficiency and conservation are driving innovation. However, these companies are still at the whim of the macro, specifically interest rates that heavily impact new and existing home sales. In fact, homebuilders are one of the most cyclical subsectors within industrials.

Competitors of KB Home include D.R. Horton (NYSE:DHI), Lennar (NYSE:LEN), and PulteGroup (NYSE:PHM).

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, KB Home’s sales grew at a mediocre 7.2% compounded annual growth rate over the last five years. This was below our standard for the industrials sector and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. KB Home’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 1.9% annually.

KB Home also reports its backlog, or the value of its outstanding orders that have not yet been executed or delivered. KB Home’s backlog reached $2.29 billion in the latest quarter and averaged 20.8% year-on-year declines over the last two years. Because this number is lower than its revenue growth, we can see the company hasn’t secured enough new orders to maintain its growth rate in the future.

This quarter, KB Home’s revenue fell by 10.5% year on year to $1.53 billion but beat Wall Street’s estimates by 1.6%.

Looking ahead, sell-side analysts expect revenue to decline by 3.4% over the next 12 months, similar to its two-year rate. This projection is underwhelming and suggests its products and services will face some demand challenges.

KB Home has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 22.5% gross margin over the last five years. That means KB Home paid its suppliers a lot of money ($77.50 for every $100 in revenue) to run its business.

KB Home produced a 19.6% gross profit margin in Q2, marking a 2.3 percentage point decrease from 21.9% in the same quarter last year. KB Home’s full-year margin has also been trending down over the past 12 months, decreasing by 1.1 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

KB Home’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 12% over the last five years. This profitability was top-notch for an industrials business, showing it’s an well-run company with an efficient cost structure. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, KB Home’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q2, KB Home generated an operating margin profit margin of 8.6%, down 2.8 percentage points year on year. Since KB Home’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

KB Home’s EPS grew at an astounding 18.6% compounded annual growth rate over the last five years, higher than its 7.2% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t improve.

Diving into KB Home’s quality of earnings can give us a better understanding of its performance. A five-year view shows that KB Home has repurchased its stock, shrinking its share count by 23.8%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For KB Home, its two-year annual EPS declines of 6.9% mark a reversal from its (seemingly) healthy five-year trend. We hope KB Home can return to earnings growth in the future.

In Q2, KB Home reported EPS at $1.50, down from $2.16 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 1.7%. Over the next 12 months, Wall Street expects KB Home’s full-year EPS of $7.59 to shrink by 8.7%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

KB Home has shown weak cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.2%, subpar for an industrials business. The divergence from its good operating margin stems from its capital-intensive business model, which requires KB Home to make large cash investments in working capital and capital expenditures.

Taking a step back, we can see that KB Home’s margin dropped by 3.4 percentage points during that time. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although KB Home hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked. Its five-year average ROIC was 12.2%, higher than most industrials businesses.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, KB Home’s ROIC averaged 2.6 percentage point decreases each year. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

KB Home reported $308.9 million of cash and $1.89 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $727.8 million of EBITDA over the last 12 months, we view KB Home’s 2.2× net-debt-to-EBITDA ratio as safe. We also see its $5.31 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see KB Home beat analysts’ revenue expectations this quarter. On the other hand, its backlog (a leading indicator of future revenue) fell short of Wall Street’s estimates. Additionally, full-year revenue guidance was lowered, as management cited that "market conditions have softened". Overall, this quarter could have been better. The stock traded down 1% to $52.80 immediately after reporting.

Updated: July 15, 2025 at 11:27 PM EDT

Before deciding whether to buy KB Home or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

KB Home doesn’t pass our quality test. To kick things off, its revenue growth was mediocre over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its astounding EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its projected EPS for the next year is lacking. On top of that, its backlog declined.

KB Home’s P/E ratio based on the next 12 months is 7.7x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $61.50 on the company (compared to the current share price of $53.63).