KB Home Looks Like a Low-Risk, High-Reward Buy Ahead of Earnings

 NEW YORK (TheStreet) -- Shares of KB Home (KBH), one of the largest homebuilders in the U.S., have been under pressure for most of 2015. Not only is KBH stock down more than 10%, against 2% gains in the S&P 500 (SPX), but it has grossly underperformed its peers, as evidenced by the 6% gains in SPDR S&P Homebuilder ETF (XHB).

All told, since KB Home closed at $16.54 on Jan. 12, shares have fallen more than 11%, and they're down more than 15% from their 2015 high of $17.25. So ahead of the company's second-quarter earnings results, due out Friday before the opening bell, the Los Angeles-based builder is at a great entry point for investors looking for a solid turnaround candidate. Trading at a price-to-earnings ratio of 1.6 (no, that's not a typo), compared to the average P/E of 21 for the S&P 500 overall, KBH is too cheap to ignore.

Granted, KB Home has benefited this year from a huge income tax benefit that massively boosted its profits. This would explain the disparity between its P/E ratio and that of the broader market. But here's the thing: Even based on its sales metric, KB Home -- at price-to-sales ratio of 0.65 -- still looks cheap, against industry P/S of 1.18.

By comparison, other homebuilders like D.R. Horton (DHI) and Lennar (LEN) trade at P/S ratios of 1.01 and 1.18, respectively. And in the most recent quarter, Lennar's revenue growth was eight percentage points lower than KB Home's (21% vs. 29%). From my vantage point, KB Home is not only less risky today, it has become a must-own stock for the months and quarters ahead.

What gives me such confidence about KBH? For one thing, the company has done nothing but execute in the past two quarters, beating estimates on both revenue and profits. Further, according to the Census Bureau, there are signs that residential home construction is starting to pick up. This was also reflected in the better-than-expected results from D.R. Horton released in April.

Not only did D.R. Horton report a 29% year-over-year jump in its sales order backlog -- suggesting strong pent-up demand for homes -- it also revealed a 21% year-over-year increase in home sales volumes, which bodes well for the results KBH is likely to report Friday. If Horton's results are any indication, KB Home may have had more demand for its homes than it had on inventory to sell.

For the quarter that ended in May, KB Home was forecast to earn 8 cents per share on revenue of $622 million, an earnings decline of 70%, while revenue was projected to grow 10%. For the full year ending in November, earnings are projected to be down 5% to 90 cents per share, while revenue is projected to increase 26% to $3 billion.

All told, KB Home has not performed as poorly as its stock price and valuation would indicate, and buying its shares in this price range would be a smart bet on the accelerating pace of its recovery. Its fiscal 2016 earnings projections of $1.31 per share are a prediction of 45% EPS growth from 2015 levels. That, combined with broader indications of a recovering housing market -- which will yield higher demand and home prices -- suggest that buying KB Home today is a low-risk investment that can offer tons of reward tomorrow.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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