On Jan 21, 2015, shares of KB Home (KBH) dropped to a 52-week low of $11.78 and eventually closed at $11.94 with a negative year-to-date return of 27.1%.
What Led to the Slump?
Share price of KB Home has declined 13.9% since the national homebuilder reported disappointing fourth-quarter 2014 results and provided a bleak outlook for 2015 on Jan 13.
The company’s adjusted earnings of 27 cents per share in the fourth quarter of fiscal 2014 declined 12.9% year over year. Earnings were weak as fewer-than-expected home deliveries hurt gross margin during the quarter.
Despite a 9% year-over-year increase, the number of homes delivered stood at 2,229 homes and was near the lower end of the company’s expected range of 2,200 to 2,400 homes. As a result, the company lost some operating leverage related to increasing indirect construction cost, which consequently hurt margins.
Adjusted homebuilding gross margin (excluding land option contract abandonment charges and warranty related charges) declined 110 basis points (bps) year over year to 18.7%.
Management was expecting homebuilding gross margin to improve sequentially over the third quarter of 2014. Instead, gross margin declined 30 bps sequentially owing to softer demand in response to pricing pressure and higher construction, labor and material costs. Margins were also affected by higher incentives in the quarter.
Meanwhile, KB Home’s outlook was even more concerning. The company expects headwinds such as higher construction, labor and material costs, higher incentives, and moderation in pricing power to continue into 2015, which would eventually pull down margins.
The company warned that gross margin would be lower than 20% in 2015. Gross margin is expected to hit a bottom in the first quarter of 2015, with sequential improvement throughout the rest of the three quarters of 2015.
KB Home carries Zacks Rank #5 (Strong Sell).
Other Stocks to Consider
Better-ranked stocks in the building/construction industry worth considering include Headwaters Inc. (HW), MDC Holdings Inc. (MDC) and TRI Pointe Homes, Inc. (TPH). While Headwaters sports a Zacks Rank #1 (Strong Buy), MDC Holdings and TRI Pointe Homes hold a Zacks Rank #2 (Buy).
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