Stocks rebounded strongly on Wednesday, with the Dow Jones Industrial Average (DJINDICES: ^DJI) closing up well over 100 points and the S&P 500 (SNPINDEX: ^GSPC) gaining almost a full percentage point.
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Small-cap stocks bested the overall market, with the iShares Russell 2000 ETF (NYSEMKT: IWM) up 1.5% and the SPDR S&P Biotech ETF (NYSEMKT: XBI) soaring 2.6%.
As for individual stocks, shares of homebuilder KB Home (NYSE: KBH) jumped following a strong earnings report, and payroll service provider Paychex (NASDAQ: PAYX) tumbled after giving weak guidance for the upcoming year.
KB Home constructs a nice quarter
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KB Home provided the latest evidence of a healthy housing market with a strong earnings report for its second quarter. Revenue grew 24% to $1 billion, and net income more than doubled to $31.8 million, or $0.33 per share. The results blew away analysts' expectations for EPS of $0.26 on sales of $927 million. Shares of KB Homes gained 5.4% on the news.
Business was strong across the board. The number of homes delivered increased 11% and the average selling price grew 11% to $385,900. Housing gross profits jump 23%, and homebuilding operating profit margin excluding inventory-related charges increased to 5.6% from 4.7% in the period a year earlier. Orders were strong as well, pointing to healthy growth for the rest of the year. Orders were up 15%, driven by an increase of 23% in the West Coast region, and the backlog grew 19% to $2.18 billion.
Chairman and CEO Jeffrey Mezger was upbeat about the outlook for housing. "The housing market recovery continues on a steady path, supported by favorable industry fundamentals," he said in the press release. "Recent improvements in consumer sentiment and employment, combined with relatively low mortgage interest rates, are signaling further strength in the demand for housing. At the same time, the supply of available homes in many areas across the country remains insufficient to satisfy current needs."
Coming on the heels of a strong second quarter report from Lennar last week that included similar comments about the strength of demand for new homes, the news boosted optimism about the industry, and other housing-related companies saw their stocks rise as well.
Paychex's underwhelming outlook
Payroll and human resources service provider Paychex reported fiscal fourth-quarter earnings that slightly exceeded Wall Street expectations, but its 2018 guidance disappointed investors. Earnings were $0.54 per share, up 10% and $0.01 more than analysts expected, and revenue grew 6% to $798.6 million, compared with a consensus estimate of $797.7 million. Guidance for next year is for revenue to grow by 5% and earnings per share to rise 7%-8%. Paychex stock fell 3.5% on the news, but recovered to close down 1.7%.
In the press release, CEO Martin Mucci commented:
Fiscal 2017 was another year of solid growth in revenue and earnings. Our business model remains strong as evidenced by our industry-leading margins. We continue to focus on providing our clients the value of our complete human capital management, or HCM, solutions with a combination of leading technology and dedicated service.
Market observers sometimes look to Paychex's results to get an idea of economic activity going forward, since its business provides some visibility of job and wage growth in small companies. In the conference call, executives cited slowing job growth and political uncertainties as factors that held back outsourcing decisions, against a backdrop of some wage growth. But Paychex investors may be more concerned that the company's payroll service client base was flat from the previous year. Management believes that client growth will resume in 2018, but investors may be worried that the company is losing market share to competitors in the space.
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