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Taking A Dive Into KB Home's Beat And Raise Quarter

Taking A Dive Into KB Home's Beat And Raise Quarter

KB Home (NYSE: KBH)'s beat-and-raise earnings report on Tuesday wasn't good enough for analysts at MKM Partners to change its Neutral stance on the stock.

MKM's Megan McGrath maintains a Neutral rating on KB Home's stock but with a price target raised from $20 to $24 as the company's order growth was soft in the quarter. Specifically, KB Home's order growth of 5 percent was short of the analyst's 10-percent expectation and the Street's consensus estimate of 8 percent.

While KB Home's gross margins were "solid" in the quarter at 16 percent and boosted higher for fiscal 2017 (from 16.1–16.5 percent to 16.3–16.7 percent), the margin rate is still below some of its larger home building peers, the analyst continued. While a gross margin improvement is favorable the company will need to maintain a positive balance between order growth and gross margin and be careful not to sacrifice too much of one for the other.


Finally, the company's reported SG&A of 10.4-percent beat the analyst's estimate of 11.2 percent and the company believes there is room for further improvement as it grows revenue in the bottom half of the year.

Bottom line, KB Home's higher earnings estimates and margins outlook is reason enough to justify a higher price target, but the recent slowdown in order pace "gives us slight pause" on the stock heading into the bottom half of 2017.

At time of publication, shares of KB Home were up 3.72 percent at $23.67.

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