Homebuilder stocks didn't go out with the bang investors hoped for in 2015.
Owing to weaker-than-expected home sales and tepid housing starts in the last two months of the year, the group instead fizzled, sending the SPDR S&P Homebuilder ETF (XHB) down 7% and 5% in the respective three-month and six-month periods to close out the year.
While the ETF did end 2015 with a modest gain of 0.76%, which beat the 2% decline in the S&P 500 (SPX) index, the prospect of rising interest rates makes it tough to bet on homebuilders in 2016.
Shares of KB Home (KBH) , -- down 14% and 28% in the past three and six months, respectively -- seem attractive today at a forward P/E of nine, compared to the S&P 500 index's forward P/E of 17. But the company's profit margins don't suggest that its earnings growth for fiscal 2016 will reach a level to make KBH stock worth buying today, especially with the prospect of higher interest rates pressuring homebuyers.
Headquartered in Los Angeles, KB Home reports fourth-quarter fiscal year 2015 earnings Thursday before the opening bell. For the quarter that ended in November, analysts on average expect KB Home to earn 50 cents a share on revenue of $1.07 billion, compared to the year ago period when it earned 28 cents a share on revenue of $796 million. For the full year, earnings are projected to be 90 cents a share, down 4%, while full-year revenue of $3.11 billion would mark a year-over-year increase of about 30%.
The projected revenue growth is impressive. But KB could do a better job of turning its revenue into profits, as evidenced by the projected full-year earnings decline. In its fiscal third quarter, for instance, its adjusted gross profit margins declined about 160 basis points to 21.1%, even though both home deliveries and average selling prices increased 25% and 9%, respectively.
Likewise, in its fiscal second quarter, despite a 10% year-over-year jump in revenue, reaching $623 million, KB's Housing gross profit margin of 16% was down 290 basis points from a year earlier, leading to a significant decline in operating profits. The company continues to be impaired by higher land costs and construction expenses, which adds pricing pressure in some of its key markets.
While the company's stock -- trading around $12 -- might look appealing at near 52-week lows, investors would do well to ignore the cheap valuation and focus on the company's decline in profits. But should the shares fall below $10, which would be a three-year low, then I would reconsider. Until then, KBH stock lives in the wrong neighborhood.