KB Home's Earnings Beat Wins Double Upgrade From Bank Of America

KB Home KBH's fiscal second-quarter report Thursday prompted Bank of America Merrill Lynch to shift from a bearish to a bullish stance.  

The Analyst

Bank of America's John Lovallo II upgraded KB Home from Underperform to Buy with a price target lifted from $32 to $37.

The Thesis

The case can be made that KB Home's stock is mispriced and concerns surrounding the homebuilder group are overblown, Lovallo said in the upgrade note.

A stronger-than-expected earnings beat in Q2 was driven by stronger revenue ($1.1 billion versus expectations of $1.04 billion) while a better-than-expected gross margin rate (17.7 percent versus 17.2 percent) offset higher-than-modeled SG&A as a percent of homebuilder sales.

While KB Home did show weaker-than-expected order growth of 3.4 percent in the quarter versus the analyst's expectation of 9.5 percent, sales per community rose 15 percent, which suggests a positive demand readthrough for KB Home and the entire homebuilder group, the analyst wrote.

KB Home has executed above expectations for several quarters in a row, which puts an end to a bearish stance on the stock, Lovallo said. The company remains well-positioned to take advantage of the homebuilding cycle, which still has room to grow, the analyst said. 

Price Action

KB Home shares were trading higher by 6.33 percent at the time of publication Friday morning. 

Related Links:

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KB Homes Downgraded On Valuation Risk After 'Ballistic' Growth

Photo courtesy of KB Home.