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M/I Homes Surges on Surprise Profit

M/I Homes is the latest homebuilder to surge on a surprise fourth quarter profit, following D.R. Horton's Tuesday market winner with another homebuilder earnings pop on Wednesday morning.

(M/I homes story updated for closing info in homebuilding sector)

COLUMBUS, Ohio (

TheStreet

) --

M/I Homes

(MHO) - Get Report

was up 6.6% on Wednesday, on close to four times it average daily volume of trading, after posting a fourth quarter profit.

M/I Homes was the latest homebuilder to report a profit in the quarter, with net income of $7 million or 38 cents per share. This earnings period has been the first in years that has showcased profitability from homebuilders. The Street had been expecting a loss per share of 43 cents from M/I Homes, though that estimate did not tax into account a one-time tax benefit that was a big percentage of the earnings per share. It is important to distinguish between tax benefit-based profits, and actual normalized earnings.

On Tuesday, homebuilding bellwether

D.R. Horton

(DHI) - Get Report

reported better-than-expected earnings and the homebuilding sector surged.

D.R. Horton would have achieved profitability of 9 cents per share even without a one-time tax benefit that had helped other homebuilders, including

Lennar

(LEN) - Get Report

and

KB Home

(KBH) - Get Report

, to book profits in the most recent quarter.

Notable in the case of M/I Homes is that, as in the case of D.R. Horton, it achieved profitability without the tax benefit, albeit, only by a small margin. M/I Homes has $3 million in pre-tax income in the fourth quarter 2009. The $31 million tax benefit that the homebuilder booked was offset by $27 million in impairments and one-time costs for a total net income of $7 million.

On Wednesday, the homebuilding stock rally seemed to run out of steam. While M/I Homes was surging, the other homebuilder stocks were giving back some of Tuesday's big gains. D.R. Horton ended Wednesday marginally positive. D.R. Horton and

Pulte Homes

(PHM) - Get Report

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one of the big homebuilders yet to report, were the only stocks in the sector other than M/I Homes that had positive gains on Wednesday.

There is still a big gap between a $3 million pre-tax net income and normalized earnings. Some analysts believe that

D.R. Horton and other homebuilders may be getting a little ahead of themselves in this week's surge of investor buying.

M/I Homes' operating data was improved in the fourth quarter, and the combination of its return to profitability and its increase in orders helped pushed the homebuilder to the biggest gains in the sector on Wednesday morning.

Orders were up by a little over 100 units in the fourth quarter, and cancelations were down to 23%, from 31% in the fourth quarter 2008.

Homes delivered in 2009's fourth quarter were 858, an increase of 55% from 2008's fourth-quarter level of 554 homes. The sales value of homes in backlog increased to $272,000 from $247,000 at the end of 2008.

M/I Homes' gross margins improved throughout 2009, going from 12.7% in the first quarter to 16.3% in the fourth quarter. Analysts often point to a range of between 18% and 22% gross margins as normal for the homebuilding sector.

In fact, when

NVR

(NVR) - Get Report

, the best-performing homebuilder through the market downturn, reported a gross margin decrease this quarter, at least

one analyst saw it as a sign that the homebuilding sector may still take years to return to normal earnings.

-- Reported by Eric Rosenbaum in New York.

RELATED STORIES:

>>Horton Delivers, But Not All Call a Buy

>>Builder Margin Stalls: Cause for Concern?

>>Lennar Bull Puzzled By Extent of Share Rise

>>Homebuilders Drop on KB Disappointment

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