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TheStreet Open House

Homebuilders Drop on KB Disappointment

LOS ANGELES ( TheStreet) -- KB Home (KBH) followed in the profitable footsteps of Lennar (LEN) on Tuesday morning by reporting the second-consecutive homebuilder profit in the fourth quarter.

Both profits were derived from one-time tax benefits -- but while Lennar's profit led to a huge surge in the homebuilders, KB Home's fourth quarter profit was actually sending homebuilders down on Tuesday morning. All the public homebuilders were declining, except for Lennar.

Which begs the question: With both Lennar and KB Home reporting similar tax-based profits, why would the market react so strongly positive to the Lennar earnings and so decidedly negative on KB Home? The answer is in the details of the operating data of both homebuilders, and some big disappointments from KB Home.

The No. 1 factor that analysts are looking at in homebuilder recovery is the rise of net order numbers, and KB fell far short of what the sell side expected. Net orders came in at 1,446 for the fourth quarter, a much smaller improvement than analysts had forecast -- some looking for net order growth in the range of 2,000 units.

The outlook for net orders from KB Home had been bullish, with the housing recovery in its biggest market of California, and much talk from the company's own management about the success of its low-end Open Series of homes, which is now going to be a point of debate between KB Home management and the Street.

KB Home was down 5.3% in early trading after the market open on Tuesday. The Ryland Group (RYL), D.R. Horton (DHI), Pulte Homes (PHM), M.D.C. Holdings (MDC) and Hovnanian Enterprises (HOV) were all declining on Tuesday morning in a range from 1.5%-2%. The same was the case with Meritage Homes (MTH) and M/I Homes (MHO).

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