On Jan 16, Zacks Investment Research downgraded KB Home (KBH) to a Zacks Rank #5 (Strong Sell) soon after the national homebuilder reported disappointing fourth-quarter 2014 results and provided a bleak outlook for 2015 on Jan 13.
Why the Downgrade?
Most of the estimates went downhill as the company’s adjusted earnings of 27 cents per share in the fourth quarter of fiscal 2014 missed the Zacks Consensus Estimate by a significant 48% and 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, moderation in pricing power, to continue into 2015. 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.
Stocks to Consider
Better-ranked stocks in the building/construction industry worth considering include Headwaters Incorporated (HW), PulteGroup, Inc. (PHM) and TRI Pointe Homes, Inc. (TPH). While Headwaters Incorporated sports a Zacks Rank #1 (Strong Buy), PulteGroup and TRI Pointe Homes hold a Zacks Rank #2 (Buy).
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