S&P Downgrades KB Home to Sell

Analyst Thomas Smith notes the company's stock option investigation. Plus: analysts comment on Lehman, RPM International and more

KB Home (KBH): Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Thomas Smith, CFA

We think KB Home is appropriately cutting prices and reducing inventory in response to the housing market downturn. But we believe the shares face more uncertainty than peers due to a stock option investigation that is leading to financial restatements and leadership changes including KB Home's chairman and CEO. Adjusting our earnings per share (EPS) estimates for the lower sales we foresee, and guidance for large inventory impairment charges in the Nov. quarter, we are cutting our fiscal year 2006 (ending Nov.) and fiscal year 2007 EPS estimates to $5.70 and $3.75, from $8.25 and $7.45. Our target price remains $48, based on updated price to book.

Accenture (ACN): Reiterates 3 STARS (hold)

Analyst: Dylan Cathers

We are raising our target price by $2 to $39, based on peer-premium p-e of 20.5, and p-e-to-growth of 1.37 applied to our calendar 2007 EPS estimate of $1.90, assuming a 3-year growth rate of 15%. We think the premium is warranted by the low double-digit growth of Accenture's consulting revenues, which tend to have wider margins than its outsourcing business, rising levels of new bookings and solid balance sheet, with cash and short-term investments of $2.7 billion and little long-term debt. We are raising our fiscal year 2007 (August) EPS estimate to $1.85 from $1.81, fiscal year 2008's to $2.11 from $2.06.

Lehman Brothers (LEH): Maintains 5 STARS (strong buy)

Analyst: Matthew Albrecht

Following management's comments and an update to our model, we are increasing our fiscal year 2007 (November) EPS estimate to $8.14 from $7.98. We believe that investor appetite for fixed income securities should support continued strength in Lehman's trading and underwriting operations. We also expect the company's asset management business to continue its growth in the year ahead, fueled by new products and strong equity markets. We are raising our 12-month target price to $94 from $88, based on a p-e multiple of 11.5 applied to our fiscal year 2007 EPS estimate, in line with peers.

RPM International (RPM): Reiterates 4 STARS (buy)

Analyst: Christopher Lippincott

RPM will post November-quarter results on Jan. 4. We continue to estimate EPS of 32 cents, vs. 28 cents, both before extraordinary items. We project 9% sales growth for fiscal year 2007 (May), reflecting industrial revenue growth of 15% and a modest improvement in consumer demand from fiscal year 2006. We think operating margin will benefit from improved sales leverage, cost controls and productivity gains. We are maintaining our fiscal year 2007 EPS estimate of $1.50, and introducing fiscal year 2008's at $1.69. We are raising our 12-month target price by $3 to $24 based on our relative valuation and discounted cash flow analyses.

Reliance Steel & Aluminum (RS): Reiterates 4 STARS (buy)

Analyst: Leo Larkin

Ahead of the company's earnings release scheduled for Feb. 15, we continue to estimate fourth-quarter EPS of $1.21 vs. year-ago $0.91. We still look for full 2006 EPS of $5.00, and see a decline to $4.70 in 2007 based on our assumption for a decrease in carbon steel prices. Longer term, we believe Reliance Steel will benefit from ongoing consolidation of the service center industry and acquisitions. In addition, with its strong free cash flow, we believe the company can continue to increase its dividend and buy back shares. Our p-e-based 12-month target price remains $51.

Tronox (TRX): Starts at 3 STARS (hold)

Analyst: Richard O'Reilly, CFA

This medium-sized company is the world's third-largest producer of titanium pigments. Tronox has struggled since its spinoff in late 2005, in part on plant operating problems, and the stock is selling at about 5.7 times our EBITDA estimate of $200 million for 2007, below the average of other mid-sized chemical companies. We think its legacy environmental liabilities are manageable, although a risk, and we note the company expects to sell real estate near Las Vegas over the next several years. We expect its share price discount to narrow and are setting our 12-month target price at $18.

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