On Nov 11, we maintained a Neutral rating on the U.S.
), following mixed third-quarter results announced on Sep 24,
Why the Neutral Rating?
KB Home's adjusted earnings (excluding income tax benefit) of
28 cents per share in the third quarter were a huge improvement
over the year-ago adjusted loss of 10 cents per share. Earnings
also beat the Zacks Consensus Estimate of 20 cents by 40% as
price increases and margin improvements/cost discipline made up
for the soft revenues and orders in the quarter.
In addition to the strengthening housing market, KB Home's
strategic growth initiatives helped drive pricing and
profitability in the quarter. The company gained from its
strategic shift to higher-priced and better-located communities
and also improving and refining its products to meet consumer
preferences. In addition, KB Home's focus on pricing over sales
pace also increased margins significantly.
Despite, the rising interest rates, KB Home expects further
profitability in the fourth quarter as well as in fiscal 2014 on
the back strong land position, significant financial flexibility,
rising average selling prices (ASPs), solid backlog position and
selling, general and administrative (SG&A) leverage.
Estimates were largely revised upwards after the company
announced the earnings beat and an optimistic outlook for 2014.
The Zacks Consensus Estimate for the fourth quarter rose a sharp
28.6% to 45 cents per share while that for 2014 increased by
almost 4.5% to $1.17 over the last 60 days.
However, KB Home needs to increase its volumes to boost
long-term growth.Net orders declined 9% in the quarter due to
management's reduced focus on sales pace in lieu of margin
improvement. Though total revenue increased 29% year over year,
it missed the Zacks Consensus Estimate due to net order
Further, 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
KB Home carries a Zacks Rank #2 (Buy). Other stocks in the
homebuilding sector that are performing well and deserve a
M/I Homes, Inc.
). While M/I Homes carries a Zacks Rank #1 (Strong Buy), Meritage
Homes has a Zacks Rank #2 (Buy). Among the building materials
) is worth mentioning; also carrying a Zacks Rank #2 (Buy).
KB HOME (KBH): Free Stock Analysis Report
MASCO (MAS): Free Stock Analysis Report
M/I HOMES INC (MHO): Free Stock Analysis
MERITAGE HOMES (MTH): Free Stock Analysis
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