KB Home (KBH) Debt Initiated 'Buy' at Citi

Citi credit analyst James Finnerty initiated coverage on KB Home (NYSE: KBH) 4.75% 2019s with a Buy rating.

Finnerty said, "We believe KBH has upwards ratings momentum in the medium term given company guidance for improved profitability in 2014 which is expected to lead to the reversal of a large percentage of their Deferred Tax Allowance (DTA). We believe the resulting benefit to balance sheet leverage could be a potential positive rating catalyst."

He added, "KBH management is guiding for full year of profitability in 2014 which they expect will allow them to reverse a significant portion of their DTA of $844mm. The reversal would boost shareholders equity and therefore reduce debt/cap. At recent investor day guided to Net Debt/Cap ratio target of 40-50% by 2016 vs. 77% as of 1Q14 (57% adjusted for DTA reversal). At the time they also noted that ratings agencies were waiting for the reversal before incorporating the lower leverage into KBH’s ratings.

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