On Sep 09, Zacks Investment Research upgraded KB Home (KBH) to a Zacks Rank #1 (Strong Buy) as the company has been reporting strong quarterly results this year.
Also, the recent strength in the homebuilding market is a positive and leads us to believe that the company will be able to maintain this encouraging trend in upcoming third quarter 2014 to be reported later this month.
Why the Upgrade?
KB Home has been posting positive surprises for the past two quarters. The company has been delivering solid revenues, strong housing gross margins and better operating leverage.
KB Home’s focus on communities in lucrative submarkets shifted its mix towards higher priced homes. With more high income consumers available in these high end markets, the company is able to attend robust increase in pricing.
KB Home’s order trends have been improving since the first quarter of 2014, on the back of aggressive land investments made by the company in the past quarters. KB Home spent $1.14 billion in land investment in fiscal 2013 and around $860 million so far in 2014.
The company was able to sustain its order improvement for the past two quarters, even though large homebuilders like Lennar Corp. (LEN), Toll Brothers, Inc. (TOL) and PulteGroup, Inc. (PHM) saw a sequential decline in order growth in the last reported quarter.
In addition, a slew of positive housing data released in August raises hope that the housing market recovery might finally be back on track after witnessing a soft patch on the first half of the year. Housing starts surged to an 8-month high in July, growing 15.7% from the prior month to an annualized rate of 1.093 million units. The July increase beat market expectations and came as a breather from the declines seen in the past two months.
Building permits, a gauge of future construction, also backed the trend. After declining in June, building permits grew 8.1% in July.
Homebuilder confidence data for August hit its highest level since January, clearly indicating that builders are upbeat about their prospects for future sales. Homebuilders’ confidence, as indicated by the National Association of Home Builders (NAHB)/Wells Fargo housing market index, rose 2 points to 55 in August.
New homes inventory for sale rose 4.1% to 205,000 units in July. This is a 6-month supply at the current sales pace — the highest so far this year — which suggests that the supply picture is also improving.
Sale of existing homes rose 2.4% in July, for the fourth consecutive month this year. Pending home sales rose 3.3% in July after declining in June, having risen now in four of the past five months.
With the favorable wind in the housing industry, KB Home is likely to sustain its growth momentum in the upcoming quarter.
PULTE GROUP ONC (PHM): Free Stock Analysis Report
LENNAR CORP -A (LEN): Free Stock Analysis Report
TOLL BROTHERS (TOL): Free Stock Analysis Report
KB HOME (KBH): Free Stock Analysis Report
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