Homebuilders Dismiss 'Bubble' Talk, Expect Strong 3rd Quarter Net
By Janet Morrissey, Of DOW JONES NEWSWIRES
Wednesday September 25, 10:13 am ET
NEW YORK -(Dow Jones)- The chatter about a phantom housing bubble may be getting louder on Wall Street, but it hasn't reached the ears or balance sheets of the nation's homebuilders.
Indeed, the country's homebuilders are once again poised for another round of double-digit earnings increases when they post third-quarter earnings next month, and order trends show no signs of dropping off.
"The term 'housing bubble' is a generalized and overused term spouted by people who don't understand the housing market," said analyst Carl Reichardt of Banc of America Securities. It's a "simplistic label" some use to try to characterize a runup in stock prices.
The term doesn't apply here, he contends.
Housing remains robust, thanks to strong fundamentals. Historic low mortgage rates, available credit, and tax advantages associated with home ownership are making homes affordable and attractive.
Also, rising land prices and longer, tougher zoning approval procedures have kept new construction in check. As a result, the glut of new homes that pushed the industry over a cliff in past recessions isn't there this time around.
"In 1991, there was more than a nine-month supply of housing inventory in the market. Today, there's less than four months," said D.R. Horton Inc. (NYSE:DHI - News) Chief Executive Don Tomnitz, during a Banc of America Securities conference.
But that doesn't mean certain individual markets, such as New York City, Boston and San Francisco - which saw prices shoot up, might not see home prices take a tumble. "These markets are directly correlated to stock market wealth," said Jolson Merchant Partners analyst James Wilson. In these markets, prices shot up dramatically as people cashed out of their stocks and exercised options in the booming stock market days of 1998 to 2000 to purchase homes. But today, with the depressed unpredictable stock market and financial-services firm layoffs, prices could come down, Wilson said.
"I think most of the analysts (who are talking about a housing bubble) live in New York or Boston and think it's the same across the country and it's not," said Gordon Milne, chief financial officer of Ryland Group Inc. (NYSE:RYL - News) .
Builders Likely To Beat Numbers
If Lennar Corp. (NYSE:LEN - News) and KB Home , whose quarters ended on Aug. 31, are any indication, many of the nation's builders will likely exceed analysts' expectations in the quarter and post healthy double-digit earnings growth.
Although Wilson's current earnings projections call for 5% to 10% increases on average, he said he wouldn't be surprised if many wound up posting 20% to 30% increases, as KB Home and Lennar did.
Higher-than-expected profit margins will likely drive the upside surprise.
Many of the concessions, such as free appliances and upgrades, that companies brought in to drum up business following Sept. 11, have since disappeared. Indeed, builders have even started pushing home prices up in some markets, which has helped to boost margins.
The exceptions are parts of Texas and the Southeast, where land is easy to buy and build on, and builders are still offering concessions to move sales, said Reichardt.
New home orders, which serve as a barometer for revenue two or three quarters down the line when a home sale closes, have also been healthy. Wilson predicts orders will likely be up 20% to 30% on average in the quarter.
Low mortgage rates have helped drive the stalwart demand. But even as the economy recovers and rates tick up, analysts and homebuilding executives aren't expecting demand to change. "Job growth has an even stronger correlation" with housing demand, said Hovnanian Enterprises Inc. (NYSE:HOV - News) Chief Financial Officer Larry Sorsby. "I'd trade higher rates for a stronger economy and job growth ( anyday)," he said. He speculates mortgage rates would have to climb to 8% or 8.5% before demand would be affected.
A slow economic recovery, which doesn't trigger a sudden jump in interest rates, is an "ideal greenhouse for the growth of homebuilding stocks," concurred Reichardt.
But how can builders' earnings be rising at a double-digit pace when housing starts are flat to down?
Wilson explained that larger publicly traded builders have been gaining market share from smaller less liquid builders, thanks to their easy access to capital, land and labor. And he expects this trend to continue.
Public builders have also been snapping up private builders. Lennar, for example, acquired six different builders in the quarter, noted Wilson.
Ryland Group Chief Financial Officer Gordon Milne said he's "comfortable" his company will achieve Thomson First Call's consensus estimate of $1.52 a share in the third quarter, up from $1.46 a year ago. He attributes the healthy growth to fatter profit margins, which have been driven by lower building material and labor costs.
The Calabasas, Calif., builder saw a double-digit increase in orders in the quarter. Demand was strongest in the Washington/Baltimore Mid-Atlantic region, Chicago, Texas, Florida and Southern California. Business was weaker in the Carolinas, said Milne.
Homebuilding giant Centex Corp. (NYSE:CTX - News) is on track to at least meet analysts' projections of $1.73 a share in its fiscal second quarter, up from $1.50 a year earlier. The Dallas builder saw orders rise 36% in the quarter.
Denver's M.D.C. Holdings Inc. (NYSE:MDC - News) is poised to beat Thomson First Call's consensus estimate of $1.36 a share when it posts its third-quarter earnings. However, it's not clear if the company will exceed year-ago earnings of $1.48 a share. Orders were up more than 30% in the first two months of the quarter, thanks in large part to the company's ability to open new subdivisions.
There's "a chance" Beazer Homes USA Inc. (NYSE:BZH - News) will surpass Wall Street's expectations when it posts its fiscal fourth-quarter results, Chief Financial Officer David Weiss told Dow Jones Newswires. Thomson First Call currently pegs the number at $2.69 a share, up from $2.56 a year earlier.
Although the Atlanta builder has not been raising home prices as much as it did six months ago, demand remains strong. Weiss said orders are up "well over 50%" in the quarter.
D.R. Horton's Tomnitz said his company is poised to bring in its 100th consecutive quarter of higher revenue and profits. Wall Street expects the Arlington, Texas, builder to generate earnings of 87 cents in its fiscal fourth quarter, up from 74 cents a year ago.
Hovnanian Enterprises Inc. Chief Financial Officer Larry Sorsby said he's "comfortable" with Wall Street's projection of $1.44 a share in its fiscal fourth quarter ending Oct. 31, up from 74 cents a year ago.
The Red Bank, N.J., builder saw orders jump more than 80% in the first two months of the quarter, thanks partly to the company's acquisition of the Forecast Group earlier this year. "We continue to be pleasantly surprised at the strength of the housing market," said Sorsby.
Standard Pacific Corp. (NYSE:SPF - News) of Costa Mesa, Calif., is expected to report earnings of 71 cents a share, down from 86 cents a share,
Wall Street expects NVR Inc. to generate earnings of $9.21 a share, up from $6.68 a year earlier. Meritage Corp. (NYSE:MTH - News) is slated to report earnings of $1.41 a share, up from the year earlier's $1.23 a share. M/I Schottenstein Homes Inc. (NYSE:MHO - News) is expected to earn 97 cents a share, up from 96 cents a year ago.
And luxury builder Toll Brothers Inc.'s earnings are pegged at 88 cents a share for the fiscal fourth quarter ending Oct. 31, down from 92 cents a year ago.
-By Janet Morrissey, Dow Jones Newswires; 201-938-2118 |
