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Updated from 9:18 a.m. EDT

Economic concerns overshadowed solid earnings results from homebuilders

KB Homes

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Shares of KB Homes ended down $1.37, or 2.7%, at $50.24 after the company reported third-quarter earnings that were up 39% from a year ago. Meanwhile, Lennar dropped $1.14, or 2%, to $56.65 despite having posted a 33% gain in its third-quarter profit on Tuesday.

"There is a lot of concern that what is going on between Iraq and the United States could cause a drop in consumer spending," said Lawrence Horan, an analyst at Pittsburgh investment bank Parker/Hunter. "The spike in oil prices is making people afraid of higher energy prices as well." (Horan owns shares of KB Homes, in addition to the other homebuilding stocks that he covers.)

Both KB and Lennar have seen volume and operating margins benefit from lower mortgage rates. But even as both companies upped their 2002 and 2003 earnings targets, investors expressed worry.

"The fear is that these are peak earnings, and they will not be sustained over time," said Horan, who says challenge for the homebuilders is to get people to understand that profits will be maintained long-term.

Over the past 10 years, homebuilding stocks have traded at a median price-to-earnings ratio of 10. Now, Lennar is trading at 6.9, based on 2003 earnings estimates, while KB Homes is trading at 6.5.

Lennar expects to earn $7.35 a share in 2002 and $8.25 a share in 2003, compared to forecasts of $6.76 a share in 2002 and $7.68 a share in 2003. KB Homes estimates it will earn $6.75 a share in 2002 and $7.75 in 2003. Analysts were expecting a profit of $6.50 in 2002 and $6.97 in 2003.

In the third quarter, Lennar earned $142 million, or $2.01 a share, in the quarter compared with $106.7 million, or $1.53 a share, a year ago. Analysts had predicted the company would earn $2 a share. KB Homes earned $83.9 million, or $1.95 a share, compared to $60.4 million, or $1.58 a share, last year.

Lennar's year-over-year revenue rose 18% to $1.9 billion; KB Homes' sales rose 5% to $1.29 billion.

Home sales grew 19% to $1.7 billion from a year ago, Lennar said. New home deliveries increased to 6,993 homes from 6,134 homes last year. KB Homes' housing revenue rose 8% to $1.25 billion from last year, while unit deliveries for the third quarter totaled 6,500 vs. 6,552 in the same period a year ago.