Fire Sales and Squeezed Margins at CTX

Times are bad for those of us who are rooting for the nation's beleaguered homebuilders and hoping to buy a good stock on the cheap. At least for the time being, based on the earnings report of Centex (CTX - commentary - Cramer's Take), delivered earlier this morning, there's no light at the end of the tunnel.

The company reported a deepening of both fourth-quarter and year-end 2008 losses by 546% and by 11 times, respectively, to $7.36 per share and $21.68 per share. Fourth-quarter and full-year revenues also declined dramatically, by 36% and 30%, respectively, to $2.3 billion and $7.9 billion. The company generated operating cash flow of $775 million in the fourth quarter, but the fire sale of unsold homes squeezed margins.

The company did report some positive results, including the reduction of debt by $800 million. Additionally, management reported a strategic shift to building pre-sold homes, as well as exiting from the more troubled geographic areas in the nation. On an upbeat note, management hopes to generate $1 billion in cash by June of this year, due to an additional unloading of housing inventory.

Here are the mostly negative highlights (results are for the full year, except where otherwise indicated):

• For the first time, Texas joined the ranks of disaffected markets, with a 65% decline in earnings and a 19% decline in closings.
• The Southwest bled losses of $1.16 billion, deepening the earnings loss by 546%. Closings declined in this area by 14%.
• The East posted a 153% decline in earnings and a 20% decline in closings.
• The Southeast reported a 487% decline in earnings and a 36% decline in closings, with the Charlotte and Durham area coming out relatively unscathed.
• The Northwest reported a 630% decline in earnings and a 14% decline in closings, with the Sacramento area coming out relatively unblemished with a 6% increase in sales per neighborhood.
• The Central states posted a 151% loss in earnings and a 22% decline in closings.
• Overall closings declined by 65%.
• Sales incentives and discounts squeezed margins for the fourth quarter, with the gross margin of 7.7% negatively impacted by an increase in discounts and incentives by 600 basis points year over year. On the other hand, the company reported that the discounts are being relaxed progressively, reported at 14.2% of the average selling price per home of $268,000 this quarter compared to 15.3%of this value last year.
• Despite efforts to reduce debt, the net debt-to-capitalization ratio increased to 61.4% from 52% year over year.
• The average loan size of the Centex mortgage company declined by 28%, to $10 billion.

There were a few positive results that emerged, however, including the following:

• While the backlog of houses declined overall by 37%, the new pre-sale model of homebuilding that the company is following ensured that 72% of September closings are already in the backlog compared to 53% last year.
• Unsold inventory was down 59% for the fourth quarter, and overhead per closing declined by 8.8%.

It will be a long, uphill struggle for Centex.

For Vijayraghavan's preview heading into the Centex conference call, please click here.

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At the time of publication, Vijayraghavan had no positions in the stocks mentioned.

Vasu Vijayraghavan was an academic finance professor at the University of Paris who has now turned to a new career as a financial consultant. As an academic, she wrote on corporate governance issues, especially in the European context, and she believes in a long-run and balance sheet approach to stock picking.

Currently, Vasu is working as a consultant for lawyers, doing business valuation. She is a Level II CFA candidate and enjoys writing long/short and earnings calls pieces for TheStreet.Com.

Vasu holds a Ph.D. from the University of Michigan and a B.A. from Harvard University.