Fake Earnings But Real Growth?

| February 9, 2010 | 0 Comments

Last week, Beazer Homes (BZH) reported a $48 million profit.  All of it was fake.  Yet investors moved the stock higher anyway.  Just seven days ago, homebuilder D.R. Horton (DHI) reported a huge jump in earnings.  $192 million to be exact… it too was fake.

That stock skyrocketed as well.

After being beaten down for years, the homebuilders seem to be on the rebound.  The home construction industry is one of the top performers year to date.

And economic data has been quite good.  Take for example pending home sales.  In December, pending home sales jumped 10.5% year over year.

Now granted some of this is probably due to the New Homebuyer Tax Credit.  And, some of it is from the great deals on new homes right now. Whatever the reason, the numbers are improving.

And it looks like they’re going to get even better.

Mortgage applications surged in January by 21%.  Most people don’t apply for a mortgage just for fun.  You really only take the time to fill out the paperwork if you’re going to buy a house.  This bodes well for the homebuilders… and the millions of people trying to sell their homes now.

A lot of investors were sucked into Horton and Beazer’s amazing earnings.  They looked at the raw numbers and clicked the “Buy” button.

It happens all the time.

The problem is the earnings are fake.  That’s right, fake.

They didn’t make all that money (Beazer $48 million and Horton $192 million) selling homes.  Nope.  They made that money from an accounting trick.

Both Beazer and Horton used a tax gain to report a huge part of their profits.

How is this possible?

The Worker, Homeownership and Business Assistance Act of 2009 allows these companies to carry back losses from 2009 to prior tax periods.  In other words, the companies were able to claim refunds for past tax years (2008, 2007, 2006, etc) based on losses from the 2009 tax year.

No wonder our tax code is so complex.

The government basically cut them a huge check.  Neither company actually made money… they just got a big refund check from the government… the check was so big they reported it as a profit!

Don’t you love accounting scams!?!

Neither company did anything wrong.  They are, after all, playing by the rules our leaders in government set out.  However, it taints their claims of making huge profits… and it looks a little fishy.

So I asked myself, is now really the time to get back into the homebuilders?

After looking at their quarterly reports, one data point really caught my eye… new home orders.

Both Horton and Beazer reported an uptick in new home sales.  Buyers are looking for deals and these companies are delivering quality products at decent prices.  Beazer said their cancellation rate is falling and new home orders were up by 37%!

Horton said the same thing… cancellations were down big and new home orders were up 45%.

I realize the homebuyer tax credit is driving a lot of this activity but the trend is undeniable.  Housing sales are slowly recovering.  And home construction companies are seeing cancellations fall while sales rise.  I’m not expecting any miracles here but the homebuilding industry is recovering.

It should perform much better in the coming months.

So, which homebuilding stock is my favorite?  Keep reading… I’ll address that topic in the next few weeks.

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Category: Real Estate

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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