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Homebuilder Stocks Face Long Recovery

KB Home offers a bright spot, but homebuilder stocks have more challenges to overcome.

KB Home

(KBH) - Get KB Home Report

excited investors with a lower-than-expected loss, but

homebuilder stocks

have a long way to go in their recovery.

KB Home

cut its loss by 78% to $58.1 million, or 75 cents a share. Analysts polled by Thomson Reuters predicted an 81-cent loss. The company has $1.31 billion in cash to boot.

It seems like another reason to be optimistic about homebuilder stocks. But none of these small victories will be enough to

counter months

of falling prices and sales. February's sales were still down 41% from a year ago. Some could argue that the 20% drop in the median home price to $200,900 will encourage buying, but lower prices will also hurt builders' bottom lines.

"We currently foresee no meaningful improvement in market conditions for the remainder of this year," KB Home Chief Executive Officer Jeffrey Mezger said in a statement today.

Analysts expect the 12 homebuilders in the accompanying chart to remain unprofitable for the rest of 2009. Only half are expected to climb into the black next year.

KB Home is the cheapest stock of the bunch, trading at 15 times next year's projected profit, but that's not saying much.

Ryland Group

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is priced at close to 300 times next year's projected net income while

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(TOL) - Get Toll Brothers Inc. Report

is trading at more than 100 times next year's earnings forecast.

The bleak prospects of

homebuilder stocks

are reflected in the D grades, or "sell" recommendations, assigned to the 12 companies on the accompanying chart by Ratings. Volatility and poor financials also contributed to their dismal grades.

Three of the homebuilders' shares have sunk to penny-stock status with

Hovnanian Enterprises

(HOV) - Get Hovnanian Enterprises Inc. Class A Report

emerging from a low of 52 cents in early March.

Although homebuilder stocks have been part of the recent market rebound, they remain far below their levels during the peak of the building boom. The Dow Jones U.S. Home Construction Index, of which each stock in the adjoining table is a component, crashed to less than 150 points from more than 1,000 points in 2005. The index has fluctuated between 220 and 240 points in recent sessions, down more than 75% from its peak.

To assign a grade, Ratings evaluation model quantitatively analyzes a company's stock value, financial state (based on Generally Accepted Accounting Principles) and earnings forecasts from analysts. Grades for most companies range from A-plus to E-minus, with bankrupt firms assigned marks of F.

Richard Widows is a senior financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.