Merrill Lynch cuts price targets on KB Home, Lennar; maintains buy rating

BOSTON, Jan 23, 2008 (Thomson Financial via COMTEX) -- KBH | news | PowerRating | PR Charts -- The market won't pay a premium for equity as long as conditions weaken, despite rising cash levels, according to Merrill Lynch, which reduced its price targets on KB Home and Lennar Corp. to $26 from $34 and to $20 from $31, respectively.

"Our 'Less is More' thesis favors shorter-landed builders that can reduce inventory sooner than longer-landed builders, delivering a higher net present value," Merrill Lynch said.

The brokerage said the high cash position of KB Home affirms the fundamental trend behind its "Less is More" thesis. Merrill said the reason KB's cash supply has surged is that its shorter land position enables it to shrink its business and community count (down 25-30% in 2008) faster than others, enabling its inventory to decline at a more rapid rate than its peers.

Merrill maintained a buy rating on KB Home and Lennar, saying their current valuation is undervalued relative to their net present value of owned land at depletion and a one-times book multiple on their "real" equity value and past impairments.

Shares of KB Home, a Los Angeles-based builder of single-family homes, climbed 5% to $19.46.

Shares of Lennar, a Miami-based homebuilder, gained 3 cents to $13.02.

Greg Saulnier gs/vj

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