Homebuilder Execs Cry Uncle

By Dr. Duru written for One-Twenty

August 4, 2006

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I need to balance out the recent positive things I have had to say about the short-term prospects for the homebuilder stocks. I thought it would be useful to finally do some work catching us up with the latest news headlines. In particular, I will play back the quotes from the homebuilder executives themselves as they appear in the various earnings reports over the past two months. It is quite clear that these guys have sobered up bigtime. Being forced to reduce guidance quarter after quarter will humble even the bravest of CEOs. The cries of U-N-C-L-E are bouncing from the SF Bay Area to Florida to Washington D.C... I next hope to listen in on a few conference calls and get more complete details on what is really going on behind the curtains... (you can click the links to get the original reports). Finally, note that most of these companies are doing share buybacks. I assume that this is partially a desparate attempt to maintain earnings per share numbers, but this activity is one way that prices of these stocks just might find more support at current beaten up levels.

Brookfield Homes (BHS: July 20, 2006)
  1. "Homes in Backlog and Lot Sales: With the slow demand for new homes in the San Diego/Riverside and Washington D.C. markets, the company currently estimates the range of home closings for the year ending December 31, 2006 to be 1,200 to 1,300 homes, a decrease of 18% to 24% when compared to 2005. The company continues to anticipate bulk lot sale closings of 1,500 units during 2006. Year to date, 436 lots have been closed for net income of $15 million, of which $11 million or $0.40 per share was recorded during the three months ended June 30, 2006."
  2. "2006 Earnings Guidance – The company has reduced and expanded the range of its 2006 earnings guidance to between $6.20 and $7.20 per share as a result of the impact the continued market uncertainty may have on its 2006 estimated closings of between 1,200 and 1,300 homes and the bulk land sale of 1,500 lots."
  3. “After benefiting in 2005 from increases in home prices, in 2006 we are experiencing the impact of the long anticipated slow down in housing markets, particularly in the San Diego and Washington, D.C. area. This is being brought on by negative homebuyer sentiment and increases in resale inventories. During these challenging times, we continue to proactively manage our assets as well as add longer term value for shareholders through entitling our land options,” concluded Ian Cockwell, President & Chief Executive Officer of Brookfield Homes.
Beazer Homes USA Inc. (BZH: July 27, 2006)
  1. "Beazer Homes delivered solid fiscal third quarter financial results in an increasingly difficult housing market," said President and Chief Executive Officer, Ian J. McCarthy. "Across the country, the housing markets that had experienced rapid price appreciation have seen significant increases in cancellation rates and resale home inventories. While it is difficult to predict the duration of these current market trends, our broad geographic and product diversity, coupled with our commitment to profitability and prudent capital allocation, should position us well for the future. We continue to believe that the long-term industry fundamentals, based on demographic driven demand and employment trends, together with further supply constraints, remain compelling." (Dr.Duru-speak: OK - so maybe Beazer's executives have not completely sobered up yet!)
  2. "Conditions in each of the company's major markets have become considerably more challenging as the seasonal strengthening of sales trends did not materialize to the extent previously anticipated and historically experienced." (Dr.Duru-speak: Just like I said earlier, these executives were really relying on the traditional spring home-shopping season to save them at the last second!)
  3. "Looking ahead, we do not see conditions in the housing markets improving significantly in the remainder of the fiscal year. As such, we have adjusted our expectation for our fiscal 2006 diluted earnings per share to be in a range of $9.25- $9.75. This compares to adjusted earnings per share of $8.72 in fiscal 2005."
Centex (CTX: July 24, 2006)
  1. "Despite the supply-driven correction occurring now, the company believes that the fundamentals driving industry demand remain strong and that Centex is poised to extend its leadership position in key markets in this environment." (Dr.Duru-speak: OK, yet again, these folks have not sunk to the bottom of humility quite yet)
D.R. Horton (DHI: July 20, 2006)
  1. Donald R. Horton, Chairman of the Board, said, "Our people have worked very hard to achieve these results during a time when selling conditions are very difficult in the homebuilding industry. We have experienced a changing home sales environment since the beginning of the calendar year, which became more evident during our third quarter. As we indicated when we reported our net sales orders last week, the current home sales environment is characterized by an increase in both existing and new homes available for sale, higher than normal cancellation rates and an increase in the use of sales incentives in many of our markets. Due to these factors, last week we reduced our guidance for fiscal year 2006 to $3.65 per diluted share or greater (based on approximately 317 million diluted shares) on approximately 50,000 homes closed."
KB Home (KBH: June 15, 2006)
  1. "KB Home generated solid second-quarter financial results in a progressively more challenging housing market that is struggling to find equilibrium," said Bruce Karatz, chairman and chief executive officer. "In many regions across the country, market performance has receded from the all-time highs established in recent years, largely due to a sharp reduction of speculative purchases and an over supply in new and resale inventory. Despite these conditions, our backlog and proven operating disciplines continued to drive revenues and earnings in the second quarter. Although we do not see market conditions improving significantly in the second half of the year, we remain squarely focused on driving performance and creating shareholder value by focusing on our build-to-order business model and the value of our brand."
  2. "After experiencing several years of accelerating demand for new homes, we are now operating in a more difficult market environment," said Karatz. "The country's current-year home sales will likely fall well short of the record rates we have seen in the recent past as the market works through inventory build-ups, including a spike in investor/speculator resale inventory, higher interest rates and higher cancellation rates. The impact of higher cancellation rates is evident in the substantial year-over-year decline in our net orders in the second quarter, despite gross orders that nearly matched those of a year ago. These conditions will likely persist at least through the remainder of 2006. Yet, looking at our nation's positive demographic trends and overall healthy economy, we remain confident in the long-term growth prospects of our company and the homebuilding industry."
Lennar (LEN: June 26, 2006)
  1. Stuart Miller, President and Chief Executive Officer of Lennar Corporation said, "After a long period of steady growth, the homebuilding industry has slowed, as evidenced by lower new orders and higher cancellation rates in many geographic markets across the country. These conditions are primarily the result of speculators exiting the market and changing homebuyer sentiment. Although current market conditions have softened, we believe favorable demographic trends and high employment levels bode well for long-term homebuilding fundamentals."
  2. "...we are experiencing slower new orders and higher cancellation rates. Consequently, the second half of the year will be more challenging. As a result, we are focusing our efforts on partially offsetting the effects of increased sales incentives by reducing land costs, production costs and selling, general and administrative expenses.""
Meritage (MTH: July 26, 2006)
  1. "While our Texas markets are strong and represented a larger component of our total home orders this quarter, we experienced much softer conditions in other areas, as have other homebuilders," explained Mr. Hilton. "Demand from investors and speculative buyers has decreased dramatically; inventories are up; and price concessions have increased. These conditions not only increase competition for homebuilders, but make it more difficult for our buyers to sell their existing homes, resulting in higher order cancellations. While gross orders for the second quarter of 2006 were down 17% compared to the previous year's quarter, higher cancellation rates reduced net orders by 28% for the same period."
  2. "Our Northern California markets, which first began slowing in the fall of 2005, appear to have begun to stabilize, with cancellation rates decreasing," Mr. Hilton continued. "However, Arizona, Nevada and Florida began weakening early in 2006 and are still in transition. The changing conditions in many of our markets make it challenging to accurately predict order demand going forward."
  3. "In response to these conditions, we are actively re-assessing our land positions in every market and have reduced our total lot supply since the beginning of the year. We're carefully managing lot take-downs, reducing overhead in markets experiencing slower sales to more closely match projected revenue, and constantly monitoring changing market conditions to ensure that we are able to compete successfully and maximize our operating profits," said Mr. Hilton.
Pulte Homes (PHM: July 26, 2006)
  1. "Our second quarter results reflect the changing dynamics being experienced in the homebuilding industry," said Richard J. Dugas, Jr., President and CEO of Pulte Homes. "After several years of limited house inventory and robust demand, the supply of homes for sale continues to increase, while greater buyer uncertainty about purchasing a home at this time is being further impacted by their inability to sell existing homes and the effect higher prices and interest rates are having on overall affordability.

I think you get the point now, right?!? Be careful out there!

© DrDuru, 2006