Homebuilder Land Write Down Can Skew Book Value

We just got done reading this great article in today’s WSJ: “Rule of Thumb Hammered: Judging Home Builders By Book Value Can Sting As Write-Downs Mount“. At the heart of the article is the issue of buying home builders when they approach or possibly dip below book value. The main concern is the write-downs of land and developments on the books.

The moving target moved a bit further two weeks ago, when KB Home (KBH) took a charge of $308.2 million, while Lennar took a charge of about $329 million, as the companies wrote down the value of their housing developments and land. Those quarterly charges reduced KB’s book value by about 7% after taxes and reduced Lennar’s by 4%, says Daniel Oppenheim, a housing analyst at Banc of America Securities

-- according to the WSJ article.

The article points out that last time book value was this low, the stocks rallied. But subprime issues have erased many of those gains. Our take is that there is long term fundamental value in the big players. It should be noted that we debated last time to purchase, but did not, and so missed the rally.

However, it looks like the opportunity has presented itself again. This time we are going to begin researching the main players Beazer (BZH) , Hovnanian Ent. (HOV), Lennar (LEN), Toll Brothers (TOL) (love their product) and KB homes (KBH) to name a few. We will keep a close eye on debt on the books.

We don’t think the housing slump is over yet, but we will sell puts on the stocks that are singled out. This will give us a safeguard and a lower entry point. This time, if we do miss the rally, we at least walk away from the table with something.

LEN, KBH 1-yr. chart: