KB Homes (KBH  ) shares were initially lower following the homebuilder's fourth-quarter earnings report which showed a miss on the bottom line as homebuyer demand cooled further than expected. Adding to the selling pressure was a weaker-than-expected forecast for the upcoming quarter including possible price cuts to offload inventory.

However, shares recovered these initial losses due to broad market strength and the increasing likelihood that inflation numbers have peaked and longer-term rates will move lower. Lower longer-term rates will translate into lower mortgage rates which could lead to a surge in demand. Thus, investors seem willing to overlook KB Homes' near-term weakness as long as macro conditions are improving.

Inside the Numbers

In Q4, KB Homes reported $2.47 in earnings per share which fell short of expectations of $2.86 in earnings per share. Revenue also fell short of expectations at $1.94 billion vs expectations of $1.99 billion. Overall, earnings were 29% higher, while revenue was up 16% compared to 2021's Q4.

For the next quarter, the company sees revenue between $1.25 billion and $1.4 billion which was under analysts' consensus forecast of $1.38 billion. For the full year, analysts see a 15% decline in revenue and a 33% drop in earnings per share.

The company acknowledged that the current economy is especially challenging for homebuilders due to the combination of a slowing economy, high inflation, and higher rates impacting demand. On the conference call, CEO Jeffrey Metzger remarked that "High mortgage rates and persistent inflation, together with an uncertain economy, have made homebuyers more cautious since the middle of last year." He also added that the company's focus is on making deliveries rather than sales given seasonality and the macro backdrop.

However, as the spring nears when home-buying activity naturally picks up, the company is looking to get 'more aggressive with our pricing ahead of the spring selling season, in order to generate new orders.'

It's interesting that KB Homes' financial performance wasn't really affected by the myriad of economic challenges until the latter half of this year. Yet, shares have underperformed for much of the last 18 months due to the deteriorating macro environment. Now, we may possibly be experiencing an inverse situation in which KB Homes posts middling performance but shares are rising due to lower longer-term rates and falling inflation.