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Home builders are very cheap right now, historically speaking. However, for investors in Knowledge base home (NYSE:KBH) equities, this market environment was difficult to bear.
That’s because earnings revisions are getting hammered into the homebuilding sector. Rapidly rising mortgage rates, thanks to Federal Reserve rate hikes and quantitative tightening, are hitting expectations for future demand for new homes. This was reflected in KBH stock, which is down around 35% this year alone.
However, after announcing strong second quarter results today, KBH stock rebounded. As of this writing, it has jumped over 7%.
The company reported both earnings and revenue above consensus estimates by a sizable margin. Plus, with an order book of over $6 billion of unbuilt homes, there’s a lot to like about the company’s future prospects.
KB Home posted adjusted earnings per share of $2.32, well above analysts’ estimates of $1.97. Revenue was $1.72 billion, ahead of estimates of $1.61 billion. In addition, residential construction margins remained very strong, actually increasing 390 basis points year over year to 25.3%.
Overall, those numbers were solid. However, there are other reasons why investors were excited about these results. Let’s see why KB Homes is flying today.
Why is KBH stock skyrocketing today?
Earnings reports are inherently retrospective. While the historical data is good, what really worries investors, especially homebuilders, is these companies’ future expectations for growth and margins. On that front, there’s a lot to like about these numbers, too.
KB Home suggested to investors that its backlog, as well as its business model, should ensure sustainable growth over time. In particular, the company’s built-to-order business model is something that KB Home believes can help the company navigate some choppy waters on the horizon.
Indeed, no one really knows how bad this impending recession will be, if it does materialize. New home construction will likely slow, given the current mortgage rate situation. However, if KB Home is able to maintain those margins, in the face of rising costs, there’s a lot to like about the value this business provides.
Indeed, at a price/earnings multiple of just 4.4 times (after today’s rise), KBH stock is cheap. Many investors do not miss the opportunity to buy stocks on this weakness. I can’t blame them.
As of the date of publication, Chris MacDonald had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.