Nicholas Yulico
Land Impairment Costs Hit Pulte
Pulte reported a first-quarter loss of $696 million because of land impairment charges that are being driven by falling home prices. The loss amounted to $2.75 per share, worse than the 77-cent-per-share loss analysts expected, according to Thomson Financial data. A year ago, Pulte reported a loss of $86 million, or 34 cents a share. Revenue fell 22% to $1.4 billion, roughly in line with Wall Street expectations. On a positive note, Pulte managed to cuts its corporate overhead and sales costs in the quarter, with selling, general and administrative (SG&A) expense representing 14.4% of revenue, vs. 15.4% the prior year. Orders fell 36% to 5,402 homes. This was better than the 51% decline that analysts at Majestic Research expected.Cost Structure Weighs at Ryland
Ryland's quarterly loss beat estimates, but revenues fell short. The builder reported a first-quarter loss of 69 cents a share, better than the 84-cent-per-share loss that analysts expected, according to Thomson Financial, but wider than the year-ago loss of 58 cents a share. Like with Pulte, results were dragged down by hefty land impairment charges. Revenue plunged 42% to $416 million, missing the consensus estimate of $459 million. Ryland looks to be facing more of a cost structure issue than Pulte. Selling, general and administrative expenses ballooned to 16% of revenue in the quarter, compared with 14% a year earlier. This trend is likely to keep up since Ryland has probably cut its personnel down to the bare minimum -- at a time when revenue is falling. New orders fell 28% from a year ago, while closings dropped 33%. Both of these metrics were better than the estimates from Majestic Research (which expected orders to fall 43%-48% and closings to fall 37%-43%). However, orders in Texas -- one of Ryland's larger markets -- were very weak, down 33% in the quarter. Order trends are growing worse in the market. A year ago the decline was 19%.The Takeaways
Ryland's stock closed at $32.34 Wednesday, which is 1.2 times the latest reported book value of $26 per share in the latest earnings release. Buying homebuilder stocks above book value makes little sense in a market in which companies continue to impair their owned land values because of weakening home prices. I believe buying Pulte at roughly 0.9 times book value is a trap given the company's propensity to report very large land impairment charges, a trend that may not end anytime soon. Ryland shares rose 2.5% in recent morning trading Thursday, while Pulte shares inched up 1%.| Bricks and Mortar Portfolio A Look at How Nicholas Yulico's Picks Have Performed |
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| Rating Date | Price at Rating | Rating | Current Price* | Total Return** | Year-End '07 Price | 2008 YTD Return | |
| Brookfield Properties (BPO) | 1/23/2007 | 28.67 | Own | 20.28 | -29.3% | 19.25 | 5.4% |
| Global Real Estate ETF (RWX) | 1/23/2007 | 64.00 | Own | 54.73 | -14.5% | 56.95 | -3.9% |
| Ryland (RYL) | 1/23/2007 | 56.00 | Flag | 32.34 | 42.3% | 27.41 | -18.0% |
| Trump (TRMP) | 1/23/2007 | 17.50 | Flag | 2.65 | 84.9% | 4.30 | 38.4% |
| Penn National (PENN) | 2/6/2007 | 45.56 | Own | 39.62 | -13.0% | 59.55 | -33.5% |
| Melco PBL (MPEL) | 3/12/2007 | 15.46 | Own | 13.85 | -10.4% | 11.56 | 19.8% |
| Starwood Hotels (HOT) | 7/12/2007 | 72.37 | Own | 49.62 | -31.4% | 44.03 | 12.7% |
| Home Depot (HD) | 1/30/2008 | 29.71 | Own | 28.13 | -5.3% | -5.3% | |
| Pulte Homes | 1/31/2008 | 16.35 | Flag | 13.10 | 19.9% | 19.9% | |
| Average Total Portfolio Return, Unweighted, (including closed ratings) | 18.1% | 7.0% | |||||
| Closed Ratings | Rating Date | Price at Rating | Rating | Closing Price*** | Return** | ||
| Hilton (HLT) | 3/2/2007 | 34.69 | Own | 47.50 | 36.9% | ||
| Home Solutions of America (HSOA) | 4/24/2007 | 4.98 | Flag | 1.06 | 78.7% | ||
| Standard Pacific (SPF) | 10/26/2007 | 5.25 | Flag | 2.20 | 58.1% | 3.35 | 34.3% |
| Close At Start of Portfolio | Current Value* | ||||||
| S&P 500 | 1427.99 | 1,379.93 | -3.4% | 1468.36 | -6.0% | ||
| U.S. MSCI REIT Index | 1140.36 | 935.81 | -17.9% | 870.64 | 7.5% | ||
| **For "flagged" stocks, a drop in price is tracked as a positive for the portfolio, and a rise in price is a negative. ***Hilton closed out of portfolio on 10/26/07 because Blackstone Group completed purchase of firm. HSOA closed out of portfolio on 12/26/07 at day's closing price SPF closed out of portfolio on 1/11/07 at day's closing price | |||||||
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