KB Home (KBH)

Homebuilder KB Home (NYSE:KBH) reported Q3 CY2025 results topping the market’s revenue expectations, but sales fell by 7.5% year on year to $1.62 billion. On the other hand, the company’s full-year revenue guidance of $6.15 billion at the midpoint came in 1.8% below analysts’ estimates. Its GAAP profit of $1.61 per share was 6.9% 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).

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, KB Home’s sales grew at a decent 7.5% compounded annual growth rate over the last five years. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. KB Home’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 1% over the last two years.

We can dig further into the company’s revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. KB Home’s backlog reached $1.99 billion in the latest quarter and averaged 20.4% 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 7.5% year on year to $1.62 billion but beat Wall Street’s estimates by 1.2%.

Looking ahead, sell-side analysts expect revenue to decline by 8.5% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and implies its products and services will see some demand headwinds.

Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

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 22.4% gross margin over the last five years. That means KB Home paid its suppliers a lot of money ($77.64 for every $100 in revenue) to run its business.

KB Home produced a 18.5% gross profit margin in Q3, marking a 2.8 percentage point decrease from 21.3% in the same quarter last year. KB Home’s full-year margin has also been trending down over the past 12 months, decreasing by 1.4 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 has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 11.9%. 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.

Looking at the trend in its profitability, KB Home’s operating margin decreased by 1.3 percentage points 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.

This quarter, KB Home generated an operating margin profit margin of 8.1%, down 3 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 a spectacular 16.6% compounded annual growth rate over the last five years, higher than its 7.5% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t improve.

We can take a deeper look into KB Home’s earnings quality to better understand the drivers of its performance. A five-year view shows that KB Home has repurchased its stock, shrinking its share count by 28%. 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 3.6% mark a reversal from its (seemingly) healthy five-year trend. We hope KB Home can return to earnings growth in the future.

In Q3, KB Home reported EPS of $1.61, down from $2.05 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 6.9%. Over the next 12 months, Wall Street expects KB Home’s full-year EPS of $7.16 to shrink by 16.2%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

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%, 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, an encouraging sign is that KB Home’s margin expanded by 5 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative 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 12.3%, 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. Unfortunately, KB Home’s ROIC averaged 4.8 percentage point decreases 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.

KB Home reported $330.6 million of cash and $1.94 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 $668.3 million of EBITDA over the last 12 months, we view KB Home’s 2.4× net-debt-to-EBITDA ratio as safe. We also see its $7.89 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 good to see KB Home narrowly top analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its backlog fell short of Wall Street’s estimates and the company lowered its full-year revenue guidance, which is never a good sign. Overall, this was a weaker quarter. The stock remained flat at $61.86 immediately after reporting.

Updated: December 4, 2025 at 10:45 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in KB Home.

KB Home falls short of our quality standards. Although its revenue growth was decent over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. And while the company’s rising cash profitability gives it more optionality, the downside is its projected EPS for the next year is lacking.

KB Home’s P/E ratio based on the next 12 months is 11.3x. While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $66.17 on the company (compared to the current share price of $64.18).