Standard Pacific: Bargain or Trap?
Standard Pacific
(SPF)
remains a very risky stock for investors.
The ticking time bomb with this stock lies in whether the small-cap homebuilder can start making a profit before its difficult liquidity situation pushes it to the brink of a debt recapitalization or severely dilutive offering of more stock.
Standard Pacific on Monday reported a $216 million loss in the first quarter, amounting to $3.34 a share, much worse than the $1.22 per-share loss analysts expected, according to Thomson Reuters data.
Shares of the company plunged 23% to $2.91 in morning trading Monday, reflecting a price-to book value of roughly 25%.
The quarter included $192 million of land impairment charges. Falling housing prices continue to ravage the homebuilder, as average selling prices for homes closed in the quarter fell 10% from a year ago, including joint ventures.
The declines in prices were severe in Nevada (down 29%), Florida (down 24%) and California (down 19%).
To make matters worse, even adding back the impairment charges and a deferred tax charge, Standard Pacific still reported a loss of $14.8 million.
Bargain-Hunters Beware
With the stock now trading at just 25% of stated book value, it is clearly tempting to bottom-feed with the stock.
The pitiful price-to-book ratio reflects the company's heavy exposure to very poor housing markets such as California, Nevada and Florida, where housing prices are rapidly declining, causing risks to further land writedowns.
But the stock's depressed multiple also reflects the firm's credit quality, especially in a market where equity investors are worried about getting wiped out if homebuilders recapitalize their debt or file for Chapter 11 bankruptcy protection.
To get a sense of Standard Pacific's credit rating in relation to other homebuilders, I employ a financial model I've developed based on the famous Z-score calculation by Edward Altman, a professor at New York University's Stern School of Business who specializes in corporate bankruptcies and financial distress.
My conclusion is that Standard Pacific carries a very weak credit profile that has only gotten worse over the past year.
The Z-score model uses five ratios and weights them to create a single Z-score value for a company:
- Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5
Where:
- X1 = Working Capital/Total Assets
- X2 = Retained Earnings/Total Assets
- X3 = Earnings Before Interest and Taxes (trailing twelve months)/Total Assets
- X4 = Market Value of Equity/Book Value of Total Liabilities
- X5 = Sales (trailing 12 months)/Total Assets
- Z = Overall Index or Score
A Z-score of 1.8 is considered the upper bound of distress for a firm.
My Z-score model uses the same ratios and weighting but slightly tweaks two inputs of the Altman model. The change is that I adjust homebuilders' working capital levels to exclude long-term inventories, and I add back impairment charges to EBIT in order to reflect normalized earnings.
The higher the Z score, the less risk of bankruptcy. My analysis shows that Standard Pacific's Z score has declined significantly over the past year, similar to the ugly situation playing out at competitor
Hovnanian
(HOV) - Get Report
. Both companies now have Z scores below 1.8, which signals significant financial distress.
If Standard Pacific can manage to survive, the stock is probably underpriced relative to Hovnanian. Both companies have declining credit profiles and exposure to very weak housing markets, yet they trade at much different price-to-book ratios.
Hovnanian has a price-to-book ratio of 0.54, vs. Standard Pacific's 0.25.
If both companies can manage to survive, then a possibly profitable trade today could be shorting Hovnanian and going long Standard Pacific.
Here's the data used to calculate Standard Pacific's Z-score: