KB Home Drops After Company Warns on Margins

Despite reporting quarterly sales that beat analyst estimates, Los Angeles-based KB Home (NYSE:KBH) is taking a beating after the company revealed a gloomy outlook. The homebuilder reported fourth-quarter revenues of $796 million, topping Wall Street estimates of $778 million. The company reported per-share profits of $8.36, but the figure was not comparable to analyst expectations of 56 cents given the increase was “largely” due to a deferred tax asset valuation allowance reversal of $824.2 million for the current year. The stock initially traded 4% higher right after earnings were released, but not long after a conference call with CEO Jeffrey Mezger Tuesday afternoon, the stock sank more than 12% on a weak gross margin forecast. “At the time of our last earnings call…we indicated that we believed our housing gross profit margin for the fourth quarter would improve sequentially from the third quarter,” Mezger said on the call. “Unfortunately, we experienced a softening in demand in some of our served markets as the quarter progressed….as a result we generated a disappointing fourth quarter adjusted housing gross margin of 18.7%, down 30 basis points from the third quarter.” The CEO also guided down for the current quarter, saying “we know that our gross margin will continue to lag the prior year comp for some time…as a result, we are projecting our first quarter 2015 gross margin will drop significantly from the first quarter of 2014.” Analysts are looking for a first-quarter gross margin of 18.4%, compared to 17.5% in the first quarter of 2014, according to data from FactSet Research Systems.   Despite the downbeat short-term guidance, the company is more optimistic about the picture of the housing market as a whole. “The housing market and the broader economy, had a measurable impact on our financial position,” Mezger said in a statement. “We are energized by our achievements in 2014 and the opportunities ahead.” KB Home shares traded 16% lower in recent action.