UPDATE: ISI Group Upgrades KB Home to Neutral Following Earnings Report

In a report published Wednesday, ISI Group analyst Stephen East upgraded the rating on KB Home KBH from Cautious to Neutral. In the report, ISI Group noted, “Following KBH's earnings, we are upgrading our rating to Neutral from Cautious. We still have concerns about the California robustness, but we give the benefit of the doubt as we look to the next several quarters for validation. If KBH can pull-off the move from the Inland Empire to the Coastal California markets, from traditional entry level to Move Up and affluent entry level, then the earnings story has useful upside as the gross margin should steadily grow while SG&A continues its fine leverage story. Our field research showed that KBH priced too aggressively, we don't believe the two issues are mutually exclusive and that issue is why we still have concern about the CA market. Further, we worry that recent land deals need price appreciation to move the gross margin meaningfully. Despite those concerns, we recognize the increased earnings power a few years out if the switch occurs.” KB Home closed on Tuesday at $17.76.