KB Matches Lennar's Tax-Based Profit - TheStreet

KB Matches Lennar's Tax-Based Profit

KB Home becomes the second homebuilder in the last week to return to profitability in the fourth quarter -- but taxes, and not operating improvements, are driving the upbeat earnings.
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) -- For the second-consecutive week, a homebuilder has leveraged the U.S. government's one-time tax gain gift to book its first profit in years. KB Home reported before the market open on Tuesday morning that it had booked a profit of $1.31 per share in the fourth quarter on net income of $100.7 million.

However, KB Home had a one-time tax benefit of $191.7 million, while actual housing revenue -- remember, builders build and sell homes most of the time, as opposed to building tax-based profits -- fell 27% from the same quarter 2008. Revenues for fourth quarter 2009 were $674.6 million, versus $919 million in 2008.



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surprise profit last week based on a similar, and even larger-sized tax benefit, shares of all the homebuilders surged, especially

Lennar, which managed a one-day 15% gain. The government's new Too Big to Not Build tax bailout plan for the homebuilders seemed to send investors back into the beleaguered homebuilder sector.

However, analysts were somewhat

perplexed by the level of excitement generated by the Lennar tax-based profit, since taking tax gains has been a trick used by banks for years to engineer, as opposed to earn, profits. There were some encouraging signs among the Lennar operating data, related to orders and cancellation levels, which are deemed more important to recovery.

It seemed, at least early on Tuesday morning, that investors were reacting with more caution to the tax-based profit from KB Home, with shares of the homebuilder down 2.75% in the pre-market trading session.

And there is good reason for caution based on a look at the operating data in the KB Home fourth-quarter report. The average sales price of homes was virtually flat with the previous quarter, at 203,400, and declined 12% from the prior year.

Jay McCanless, analyst at FTN Equity Capital Markets, had said that even though some pricing power has returned to homebuilders,

KB Home would have to do much better in average sales price than his prediction of a 12% decline for him to change his neutral rating.

Net orders increased to 1,446 in the fourth quarter of 2009, up 12% from 1,296 in the year-earlier period. However, FTN Equity's McCanless had been looking for net orders up over the 2,000 for the fourth quarter based on the comeback in California and the success of KB Home's Open Series low-end homes. What's more, the backlog of homes did not move as significantly as some might have hoped it to move, down from 2,269 homes in the fourth quarter 2008 to 2,126 in the fourth quarter of 2009, a decrease of 6%.

KB Home also managed a solid improvement in fourth quarter housing gross margin, up by 15.4% to positive 6.8% in 2009 from negative 8.6% in 2008.

KB Home's cancellation rate also improved, to 31% in the fourth quarter of 2009, from 46% in the fourth quarter of 2008. Bringing cancellations down while increasing orders is the recipe for recovery for the homebuilders, but did KB Home show enough of a reversal of this formerly negative trend to be headed for non-tax-related profits soon?

A final positive note in the KB Home fourth-quarter earnings was continued cost cutting opportunities for homebuilders, as the focus on small-home sales has reduced material and transportation costs. KB Home's total expenses fell by more than $300,000 versus fourth quarter 2008, and for the full fiscal year 2009 were half of 2008 costs.

KB Home CEO Jeffrey Mezger tried to keep the message positive, saying "KB Home's 2009 fiscal year culminated with a solid fourth quarter performance ... we substantially reduced our pretax loss from the prior year,

and expanded our housing gross margin for the fifth straight quarter... In addition, we view the growth in our fourth-quarter net orders as evidence that we are continuing to attract and meet the demands of today's homebuyers."

However, the KB Home CEO acknowledged that in homebuilding, recovery is not right now about the balance-sheet strength, but the operating data and its relationship with job growth, or lack thereof. Mezger said his excitement was, "tempered, and could ultimately be undermined, by persistent economic weakness and unemployment."

-- Reported by Eric Rosenbaum in New York.


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