To The Moon

$KB Home(KBH)$ $Lennar(LEN)$ $D.R. Horton(DHI)$ I see a disciplined operator meeting its own marks while demand softens; that tension frames both the quarter and the trade into 24Sep25.

📊 Q1 Results Snapshot

GAAP diluted EPS was $1.61 on revenue of $1.62B; both ahead of consensus. Net income was $109.8M. Housing gross margin printed 18.2%, or 18.9% excluding inventory charges; SG&A ran at 10.0% of housing revenue. Homes delivered were 3,393, down 7% year on year; average selling price was $475,700, slightly lower year on year. Orders fell 4% to 2,950; monthly absorption slowed to 3.8; cancellations rose to 17%; backlog value declined 32% to $1.99B.

🧵 Forensic Free Cash Flow Analysis

Liquidity stood at $1.16B, including $330.6M cash and $831.7M revolver capacity with $250M drawn. Inventories increased 6% to $5.84B; that working-capital build offsets cost controls and keeps cash conversion sensitive to deliveries. Land and development investments declined 7% to $1.95B; Q3 land-related spend fell 39% year on year to $514.1M, which supports free cash flow even as orders soften. Balance sheet leverage ticked up as notes payable rose to $1.94B; debt to capital reached 33.2%. The cash-flow read is constructive on discipline; the inventory build is the swing factor for near-term FCF.

📈 Segment Breakdown

Homebuilding revenue decreased 7% year on year; operating income was $131.2M with an 8.1% margin, down 270 bps on lower housing gross margin and mix. Excluding inventory charges, homebuilding operating margin was 8.8%. Financial services pretax income was $8.7M, lower year on year on reduced insurance commissions and lower loan origination volume. Built-to-order carries a 250–500 bps gross-margin premium to spec; management is leaning back into this mix to protect profitability.

💵 Capital Returns & Guidance

FY25 guidance: housing revenue $6.10B–$6.20B; ASP about $483K; homebuilding operating margin about 8.9% assuming no inventory charges; housing gross margin 19.2%–19.3%; SG&A 10.2%–10.3%; ETR about 23%; ending community count about 260. The midpoint trails the Street, implying deceleration in the revenue line while margins hold steady under tight cost control. Capital returns remain a centrepiece: 3.3M shares repurchased for $188.5M in Q3; $438.5M repurchased year to date; more than $490M returned including dividends; $261.5M authorisation remains; management expects to continue repurchases in Q4-25 and FY26.

🌍 Macro & Behavioural Edge

Affordability improved as mortgage rates eased by roughly 60 bps; management estimates about $30K more purchasing power for the average buyer, yet traffic has not inflected meaningfully. Strategy prioritises price transparency and value over aggressive incentives; Q3 pricing was the most stable all year with 70% of communities steady or higher, and order ASP pressure driven by geographic mix.

Regionally, divergence is stark. The South Atlantic division led with 344,313 new single-family starts in 2024, followed by the West South Central at 187,690 and Mountain at 125,911. Coastal California and Denver remain challenged while Inland Empire, Houston, Charlotte, and Las Vegas are resilient. KBH’s footprint overlaps both strength and softness, sharpening the importance of mix management.

Cycle positioning matters. Total US homes under construction stand near multi-decade highs at 1,519K, a level last seen during prior housing booms. KBH’s 32% YoY backlog decline contrasts with a national pipeline that remains historically elevated, intensifying absorption risk.

When overlaid with home price inflation, the picture is clearer. Construction activity remains high even as HPI growth moderates, confirming a supply-demand mismatch. Lower mortgage rates have improved affordability, but elevated supply keeps buyers cautious and order momentum uneven.

Key questions:

1. Has absorption improved since rates dipped in late Q3, and what is the early-Q4 run-rate.

2. What drives the sequential Q4 gross-margin step-down; mix timing or new incentives.

3. How far can BTO mix expand without constraining cycle time and deliveries.

4. What is the updated cadence for land spend if the lot market continues to soften.

📊 Expanded Technical Trade Plan

Short term: consolidating between $60 and $64 after the post-print fade; EMAs bunch on the 4H around $63–$64. Medium term: higher-lows structure from the early-Aug trough remains intact as long as $60 holds. Line in the sand: $60. Ignition: reclaim $65.50 where upper Keltner aligns with the 21/55-EMA confluence; momentum likely flips positive there. Risk and reward: base case long against $60 with a stop just below $59.40; first targets $68 and $72; partials into $64–$65.50 if momentum stalls.

✅ Conclusion

The quarter shows a builder executing on what it controls: margins beat guidance; SG&A discipline holds; BTO mix supports unit economics. Against that, orders, absorption, cancellations, and backlog confirm softer demand; the second revenue guide-down this year narrows the near-term bull case to cost control and capital returns.

On cash flow, reduced land spend and steady margins help sustain internal funding for buybacks; inventory growth is the watch-item since it governs working-capital release. With book value per share at $60.25, valuation provides a tangible anchor and makes repurchases accretive; leverage is manageable at a 33.2% debt-to-capital ratio.

Technically, the $60 floor is clear; reclaiming $65.50 would confirm a momentum turn toward $68 and $72. Until then, I am trading the range with respect for the demand tape. The numbers frame the debate; the probabilities define the trade.

Here’s the blueprint traders are watching now:

📍 Levels Map

🔵 Stability / Floor (Support): $60.00

🔴 Stop / Danger Zone (Resistance): $64.00

🟠 Alert / Ignition (Breakout): $65.50

🟢 Profit / Go (Upside Targets): $68.00, $72.00

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Trade like a boss! Happy trading ahead, Cheers, BC 📈🚀🍀🍀🍀

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