Bottom Falling Out of the Housing Bottom - Meritage vs Centex
By Dr. Duru written for One-Twenty
May 1, 2006
Homebuilder stocks have put up a good fight in 2006, but, slowly but surely, these favorite whipping boys of the bears on the U.S. economy are slipping away. One-by-one I am noticing that the stocks I follow in this industry are making new lows for 2006. When such a thing occurs, you can be sure that more pain is ahead. Even more ominous is that these failures portend more trouble for the housing economy. The market tries to be forward-looking, and the market is providing us a more definitive vote against the overall health of the housing industry. I have been writing about a potential bottom all year, and this story has unfolded with many thrills and chills. As interest rates continue to creep forward, as inflationary pressures continue to build, and even as pending immigration legislation may create labor shortages in the indsutry, it is time to cut the losses on this story!
Now, mind you. I have not given up. My theme this year has been to provide counter-points to despair in the financial markets, so I am still looking for the glimmers of hope even as the general outlook dims. Last week's housing hope was Meritage Homes (MTH). MTH blew past earnings expectations and defied the pessimists by issuing a relatively bullish outlook. The bottom for homebuilders finally looked in place. In February, I used action in Meritage stock as an indicator that we had seen peak negativity. Meritage seemed like one of the the worst in the bunch, so when it apparently surged off its bottom, all seemed well in hand. MTH proceeded to disappoint, but it has spent the last two months making a bottom seem real again. Anyway, numerous homebuilder stocks responded to MTH's good news by soaring on the news but most completely faded by the end of the trading day (April 26, 2006). MTH held on for an 8% gain on the day.
The market wasted no time in following through on that fade - somehow sensing that fresh bad news was right around the corner. Sure enough, Centex (CTX) delivered. CTX completely ruined the party by issuing the kind of awful report that the housing bears have been expecting from the homebuilders: missed earnings expectations by 19 cents (6%), slashed guidance for the current quarter to $1.35 - $1.45 versus the $2.16 analyst consensus, and finally issued a ridiculously large range for the 2006 fiscal year of $8.50 - $10.00 (consensus at $9.72). It seems that despite CTX's persistent reassurance that their firesales would have no material financial impact, I strongly suspect that the heavy promotions finally caught up with them. I will have to check out the conference call sometime soon. While MTH survived the fresh waves of despair, most homebuilder stocks promptly swung just as sharply down as they had swung up the day before. Homebuilder stocks like CTX, KBH, DHI, RYL, LEN, HOV, and BZH all made fresh lows for 2006. In fact, only TOL and PHM avoided the stain...and PHM looks ready to give up any day now (TOL has been the stock that I have played as a part of this housing bottom theme. See ). And so the rollercoaster at the housing "bottom" continues. This time, however, I think the optimists, bulls, and other buyers of these stocks are finally getting tired. The potential positive catalysts are thinning out, and the negative catalysts are weighing more and more heavily. The Fed next meets on May 10th. While I think the Fed recognizes that they have finally succeeded in cooling off the housing market, I think any bounce in homebuilder stocks from any benign Fed-speak will again be short-lived.
In the meantime, let's take a closer look at what Meritage had to say about its earnings prospects. I listened to the conference call to get a better idea of what was supposedly so good. The executives painted a very pretty face on the outlook, but it seemed most of the analysts on the call were at best wary and more likely skeptical. Here are the highlights I noted mainly from the question and answer session with analysts: