KB Home could gain as the homebuilder reorients its corporate strategy around more profitable build-to-order houses, according to Citizens JMP Securities. The investment bank began research coverage of KB Home with a market outperform rating, and a 12-month price target of $77, suggesting roughly 45% upside. "We see the shares as undervalued at current levels," Citizens analyst James McCanless II wrote Tuesday in a 25-page report. "KB is shifting the product mix back toward to-be-built homes, which should be a long-term gross margin tailwind." KB Home had largely focused on build-to-order (BTO) construction for most of its history, accounting for roughly 70% of sales versus 30% for speculative homes. But the company shifted its focus toward spec homes in the re-housing boom during the Covid-19 pandemic. Spec homes, or houses that builders themselves design and construct, generally command smaller profits than their build-to-order counterparts. "BTO demand has improved recently and KB plans to lean into that demand because BTO homes typically have a higher gross margin than spec homes," McCanless wrote. Other tailwinds include KB's operations in California, where "existing competition is muted in most markets," and a potential rebound in gross profit margins in the fiscal year ending Nov. 30, 2027. The Citizens call is contrarian. Of the 17 analysts covering KB Home on Wall Street, only three rate it a buy, LSEG data shows. Eleven have a hold on the stock and three an underperform or sell rating. The average price target on KB Home shares is $60, suggesting 13% upside. KB Home shares have fallen 18% in the past month while the S & P 500 is down 4.5% and the iShares U.S. Home Construction ETF by 17%.
