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On Feb 11, we maintained a Neutral rating on U.S. homebuilder, KB Home (KBH - Analyst Report) based on mixed fourth quarter results. KB Home also carries a Zacks Rank #3 (Hold).

Why the Neutral Rating?

KB Home’s adjusted net loss per share of 3 cents in the fourth quarter missed the Zacks Consensus Estimate by 50%. Earnings, however, improved significantly from the prior-year quarter loss of 19 cents driven by top-line growth of 20% and reduced SG&A ratio. Total revenue beat the Zacks Consensus Estimate of $571 million.

Gross margins were, however, significantly below expectations due to rising labor and material costs. The net order growth was also slim due to declining community count. Over the past 4 quarters, KB Home has delivered an average surprise of -29.17%.

Following the release of mixed fourth quarter results, the estimate revisions were also mixed. The Zacks Consensus Estimate for 2013 has gone down 27% to 11 cents per share over the last 60 days. However, the Zacks Consensus Estimate for 2014 has increased by 7.4% to $1.02 over the same timeframe.

With the housing fundamental improving, KB Home is witnessing significant growth in both volumes and selling prices. Almost all markets are showing recovery, though to varying degrees. Moreover, the company is seeing increased demand for larger homes with more design options, which is driving average selling prices higher.

All these bode well for the company’s profitability. KB Home expects to increase its community count in 2013 as the current aggressive land acquisition and development activities are converted into open communities.

The company expects to be profitable in 2013 and hopes for meaningful revenue growth in the year with increased community count, rising ASPs, higher revenue per community, higher backlog and improving housing momentum.

All said, the increase in demand still remains at historically low levels due to current weak U.S. economic conditions and tight mortgage lending standards. Sustainable increases in housing and housing demand for the long term will require the overall economy to strengthen, including further job growth.

Alongside, the pending federal budget decisions could potentially disrupt the housing recovery. A sustainable housing recovery in the long term can be achieved only through a broad-based improvement in the overall economy, which we believe will take time. Moreover, the company’s net order growth rates are slower than that of the larger and better positioned peers.

Other Stocks to Consider

Besides KB Home, other stocks in the housing sector that are currently performing well include NVR Inc. (NVR - Snapshot Report) - Zacks Rank #1 (Strong Buy), DR Horton Inc. (DHI - Analyst Report) - Zacks Rank #2 (Buy) and Hovnanian Enterprises Inc (HOV - Snapshot Report) - Zacks Rank #2 (Buy).

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