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).

"I think people had expected more out of KB because of their focus on California," said FTN Equity Capital Markets analyst Jay McCanless. Alongside the net order disappointment were deliveries being down 21% and a cancellation rate that ticked up from the past quarter back into the range of 30% -- it had been in the 20s for the first three quarters of the year. Lennar's cancellation rate reported last week was in the 20s.

"With the original version of the federal tax credit to first-time home buyers expected to expire during the first half of the fourth quarter, KB Homes should have been delivering substantial homes, but they were still down year over year, and that probably took some people by surprise," McCanless said.

The extension of the tax credit past the original October deadline may have hurt KB Home on the back-end of the final quarter of 2009, as there was less of a rush to purchase homes during the beginning of the already slow winter/holiday season.

For those looking for positives in the KB Home reported earnings, gross margins ex-impairments were up 19%, beating a Street consensus of 15.2% gross margin improvement. FTN Equity's McCanless said this most likely could be explained by KB Home holding firm on pricing during the quarter. The average sales price reported by KB Home came in exactly where FTN Equity expected it would: 203,000.

"KB may have decided to not give out incentives in certain cases and produced much higher than expected gross margins as a result," McCanless explained. However, it was a double-edged sword, as any gross margin improvement that resulted from not budging on pricing could have led to the worse-than-expected level of cancellations.

While analysts were surprised by the level of the homebuilding surge after Lennar's better-than-expected net orders number last week, the KB Home disappointment on orders was receiving the right reaction from the market. KB Home was down 5.3% in early trading and has seen almost a full day's worth of volume attained within an hour and a half of the market open -- 3.7 million shares traded versus 4.8 million average.

"KB Home is down about as much as I would expect on that orders number," McCanless said.

-- Reported by Eric Rosenbaum in New York.

RELATED STORIES:



>>See our new stock quote page.

Follow TheStreet.com on Twitter and become a fan on Facebook.
Copyright 2009 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

If you liked this article you might like

Cramer: This Market Is Making Strange Bedfellows

Cramer: This Market Is Making Strange Bedfellows

KB Home Said One Very Important Thing to Investors on Its Earnings Call

KB Home Said One Very Important Thing to Investors on Its Earnings Call

Video: Jim Cramer on Walmart, Delta Air Lines, Lennar, KB Home and Netflix

Video: Jim Cramer on Walmart, Delta Air Lines, Lennar, KB Home and Netflix

Jim Cramer on Delta Airlines, Lennar and KB Home's Earnings

Jim Cramer on Delta Airlines, Lennar and KB Home's Earnings

Running for the Hills? Some Bond Traders Are: Market Recon

Running for the Hills? Some Bond Traders Are: Market Recon