Homebuilders Finally Snag A Profit

Some of the homebuilders have finally rewarded patient investors with the elusive prize that many have only been dreaming about for years - a profit. While it's true that most homebuilders received a strong boost to net income from tax refunds, the results are encouraging, and indicate a possible upturn in the cycle. (For real estate investment ideas, refer to A Guide To Real Estate Derivatives.)

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Income Boost
D.R. Horton (NYSE:DHI) reported a net profit of $192 million in its first fiscal quarter of 2010. The company saw its net income boosted by a $149.2 million tax refund from the government, but even after the deduction, the bottom line value outperformed last year's $61.1 million loss. The tax refund is benefiting most homebuilders as the government extended the time that companies could apply losses to prior net income. D.R. Horton expects another $352 million in the second quarter of fiscal 2010.

Management of D.R. Horton was optimistic about the balance of the year. Don Tomnitz, the CEO of D.R. Horton, said: "Let's be clear, our goal this year is profitability in each and every quarter and for the entire fiscal year." Management acknowledged that that goal might be problematic toward the end of the year once the tax refunds end and the homebuyer tax credit expires.

Mixed Results
M/I Homes Inc. (NYSE:MHO) reported net income of $7 million or 38 cents per share in the fourth quarter of 2009, but without the tax refund of $31 million, the company had an operating loss.

Standard Pacific Corp. (NYSE:SPF) reported net income of $82.7 million, or 31 cents per diluted share. The net income included a tax refund of $94.1 million, also leaving the company with an operating loss. One important part of the results was that the company took only $11.2 million in impairments in the quarter, down from $443.6 million in the same quarter of 2008. This might imply stabilization in inventory values, another important step in the cycle.

Managing Balance Sheets
The homebuilders have also gotten balance sheets in order. M/I Homes reported a net debt-to-capital ratio of 18% at the end of 2009, with no debt maturing until 2012. D.R. Horton ended its quarter with a debt-to-capitalization ratio of 28%, down more than 700 basis points. The company also has cash of $1.9 billion.

Investors will now focus attention on Toll Brothers (NYSE:TOL), which reports on February 24. Toll Brothers is one of the leaders in the industry, specializing in luxury homes.

Bottom Line
Some of the homebuilders have finally reported a profit after several of the darkest years in anyone's memory. Whether this is the start of a new up cycle for home builders, or a false start fed by government largesse is a tough decision that investors must make. (Owning property isn't always easy, but there are plenty of perks. Find out how to buy in. Read Simple Ways To Invest In Real Estate.)

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