With home prices continuing to drop and the pace of home sales slowing further, nobody has been looking for encouraging results from homebuilders.
D.R. Horton (”DHI”), the last of the major homebuilders to report earnings for the March quarter, is scheduled to post results for its fiscal 2008 second quarter before the market opens on May 6. The company is viewed as better positioned than some of its peers to benefit from the wider availability of conforming mortgages – up to $417,000 -- being guaranteed by government programs, since it attracts first- and second-time home buyers, who tend to be interested in less expensive homes.
That said, with mortgage rates very slow to track the Fed funds rate lower and banks skittish about making further loans amid rising default and delinquency rates, the housing market is expected to get worse before it begins to improve.
New home sales fell 8.5% to an annual pace of 526,000 in March, from 575,000 in February. Eleven months’ worth of new homes are now sitting on the market, the largest inventory in nearly 27 years, and the median sales price dropped from $244,200 to $227,600.
The average price of homes in the 20 largest U.S. metropolitan areas, as measured by the S&P/Case-Shiller index, fell 12.7% in February from a year ago, the biggest drop since 2001.
The weakness should be apparent in Horton’s results. Analysts expect Horton to post a net loss of 43 cents per share for the second quarter, compared with a 16-cent profit a year ago, on $1.36 billion in revenue.
In the first quarter, which ended on Dec. 31, the Fort Worth, Tex.-based company posted a net loss of $128.8 million, or 41 cents per share. That included $245.5 million in pre-tax charges for inventory impairments and write-offs of costs related to land option contracts that the company doesn’t plan to pursue. In the first quarter, home closings fell to 6,549 from 10,202 in the prior-year period
Lehman Brothers said that while it expects Horton’s home closings, net orders and revenues to remain under pressure, it doesn’t think the company’s year-over-year trends will be as weak as those recently reported by KB Home (KBH) and Lennar (LEN), which reported order declines of 57% and 56%, respectively.
In an Apr. 21 research note, Lehman analyst Megan Talbott McGrath said she expects Horton to take $350 million in inventory-related charges for the March quarter, resulting in a net loss of 70 cents per share on a 39% drop in revenue. She also predicted a 34% drop in orders from the year-ago period and a 29% decline in home closings. In spite of that, however, she reaffirmed her overweight rating on the stock. (Lehman Brothers does and seeks to do banking business with the companies it covers in its research reports and it and/or its affiliates owns 1% or more of Horton’s common stock.)
James McCanless, an analyst at FTN Midwest Securities in Nashville, Tenn., says he believes Horton’s gross margins improved slightly since the first quarter.
“I expect to hear they reduced lots [of undeveloped land] through normal [activity] and expect to hear they were an active land seller during the quarter,” says McCanless, who has a buy rating on the stock.
While he expects to see charges for losses on Horton’s land holdings, he thinks they won’t be as high as in the first quarter. But he says he’s not sure whether the charges will include write-downs of the deferred tax valuations that Horton carries on its balance sheet.
On Apr. 30, Centex (”CTX”) reported a larger-than-expected $740 million in impairment charges for the March quarter, but $379 million of that was probably accelerated by aggressive pricing, Deutsche Bank Securities said in an Apr. 30 research note. On a conference call with analysts, Centex said it had reduced its unsold inventory of homes by 64% from a year ago by selling 6,700 homes during the quarter and returning to its prior model of selling homes before building them.
Robin Diedrich, an analyst at Edward Jones in St. Louis, Mo.