D.R. Horton (NYSE:DHI), Lennar (NYSE:LEN), KB Home (NYSE:KBH), Other Homebuilders Reviewed by Ticonderoga

Noting the upcoming earnings season for homebuilders, Ticonderoga has reviewed a number of companies, including their Buy-rated D.R. Horton (NYSE:DHI), Lennar (NYSE:LEN) and KB Home (NYSE:KBH).

Ticonderoga says, "With the fourth quarter earnings season ramping next week for the homebuilders, we want to step back and review our calendar 2011 outlook for the group. Given a positive 19.3% performance in December compared with a 6.5% increase in the S&P, followed by a 13.3% increase to-date this month, investors are decidedly looking optimistically toward the builders’ prospects for 2011 and, more specifically, the impending spring selling season, which starts in earnest in February. Improved valuations, not improved fundamentals, have driven the rise in the equities, which now trade at 1.3x (ex-NVR) our favored present valued adjusted BV multiple and at 1.08x (ex-NVR) historically comparable book values, which adds back DTA valuation allowances. Absent improved fundamentals in February, March and April versus our expectations, we believe the equities have become over-extended in the near term, although still reasonably valued longer term, as the economy starts its recovery. A sustained march toward the group’s 1.6x historical BV measure will likely not occur without a healthier buyer demand scenario.

"Entering this year, we have 3 Buy, 1 Sell and 5 Neutral rated equities in our homebuilder coverage. Additionally, we have one paired trade in place. With respect to our Buy-rated names—D.R. Horton (NYSE: DHI), Lennar (NYSE: LEN) and KB Home (NYSE: KBH)- KBH is our top pick at the moment given its significant cost reduction progress and its discount valuation to the group (7% and 26%, respectively, on book value metrics above). While the first half of 2011 will likely prove challenging for the company given its low backlog, we continue to project solid profitability in 2011 and 2012. In our opinion, this should allow the equity to close the valuation gap versus its peers. Similarly, we believe risk appetite within the space will increase this year, with KBH best positioned, outside of the speculative bankruptcy risk builders, to capitalize on this shift in investor sentiment. MDC (NYSE: MDC), our lone Sell-rated equity, appears set to fundamentally underperform the group by a wide margin, in our opinion, given its industry-high cost structure. Other than a much lower valuation, we need to see a useful reduction in the company’s SG&A expense ratio prior to giving consideration to a more constructive rating. While shorting any builder may be difficult in this somewhat euphoric environment, we believe MDC has the fundamental headwinds and stout valuation to pair up with virtually any other builder we cover. For our specific paired trade, we are long KBH and short PulteGroup (NYSE: PHM). Given the above-mentioned discount valuation to the group for KBH and a premium valuation for PHM, we believe investors will be rewarded as the respective gap for each dissipates driven by improved fundamentals at KBH and continued struggles for PHM as it attempts to capitalize on its acquisition of CTX."

D.R. Horton (DHI) was trading at $13.00, down $0.33, or 2.48 percent, as of 11:56 AM EST. Lennar (LEN) was at $19.99, down $0.50, or 2.44 percent., KB Home (KBH) was at $15.14, down $0.32, or 2.07 percent.