On Aug 2, we maintained a Neutral rating on the U.S.
), following its solid second-quarter 2013 results and the
improving housing fundamentals. However, recent increases in
mortgage rates, possible change in federal lending procedure and
the lack of overall economic recovery keep us on the sidelines.
KB Home carries a Zacks Rank # 3 (Hold).
Why the Neutral Rating
On Jun 27, 2013, KB Home announced solid second-quarter 2013
results. Loss of 4 cents per share was narrower than the Zacks
Consensus Estimate of a loss of 5 cents. Earnings improved
significantly from last year, riding on higher homebuilding
revenues, improved housing gross margins and reduced SG&A
ratio. Revenues increased 73% year over year and also beat the
Zacks Consensus Estimate. Operating margins grew 7% driven by
solid gross-margin expansion and better operating efficiencies
emanating from KB Home's strategic actions.
In addition to the strengthening housing market, KB Home's
strategic growth initiatives helped drive revenues and
profitability in the quarter. The company gained from its
strategic shift to higher prices, better-located communities and
also from improving and refining its products to meet consumer
preferences. In addition, KB Home's focus on pricing over sales
pace also increased margins significantly.
Increased affordability, attractive financing options and
higher rentals are boosting demand for new homes. Supply,
however, remains limited by low home inventories, both for new
and existing homes. A shortage of land and labor is restricting
production of homes, both single and multi-family. Home prices
are, thus, moving up sharply with the market demand gaining
momentum and supply remaining limited. Further, KB Home's solid
land position places it well to meet growing demand during the
upturn, thus giving it a competitive edge over peers who are
facing land availability constraints.
KB Home expects further profitability in the remaining two
quarters and also in 2014 on the back of its strong land and
backlog positions, increased community count, rising selling
prices, increasing margins and SG&A leverage.
Following the solid second-quarter results, the estimates were
revised upwards. The Zacks Consensus Estimate for 2013 rose a
sharp 54% to 37 cents per share while that for 2014 increased by
almost 1% to $1.18 over the last 60 days.
However, the recent increases in interest rates is concerning.
The mortgage rates have started increasing from May 2013. High
interest rates decrease demand for new homes as mortgage loans
become expensive, thus lowering the buyers' purchasing power. Any
change in federal lending procedure could also add to the
Rising input costs, due to increasing costs of raw material
and labor, is also a concern. As housing starts accelerate, both
labor and construction material costs continue to experience an
upward pricing pressure, which could prove to be a major
deterrent for margins in the future quarters.
Other Stocks to Consider
Other stocks in the homebuilding sector that are performing
well and deserve a mention include
Ryland Group Inc.
) and Meritage
). All these companies carry a Zacks Rank #2 (Buy).
KB HOME (KBH): Free Stock Analysis Report
LENNAR CORP -A (LEN): Free Stock Analysis
MERITAGE HOMES (MTH): Free Stock Analysis
RYLAND GRP INC (RYL): Free Stock Analysis
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