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Centex Hit by Inventory Glut

The builder lowers its guidance as orders fall and more sales incentives cut into margins.

Updated from July 24



reported a big drop in first-quarter earnings and once again lowered its full-year forecast, citing an uncertain U.S. housing market.

The Dallas-based homebuilder posted earnings from continuing operations of $175.6 million, or $1.39 a share, for the quarter ended June 30, compared with a profit of $210.8 million, or $1.57 a share, a year earlier. Analysts, on average, expected earnings from continuing operations of $1.36 a share, according to Thomson First Call.

Including results from discontinued operations, Centex's net earnings fell to $160.3 million, or $1.27 a share, from $233.7 million, or $1.74 a share, a year earlier.

The company's fiscal first-quarter revenue increased 13% to $3.27 billion, higher than analysts' mean estimate of $3.09 billion.

For the quarter, new home orders dropped 21% to 10,419 units. Orders fell across all markets, with the Southeast (down 43%), Mid-Atlantic (down 23%), and the West Coast (down 21%) seeing particular weakness.

On the company's conference call Tuesday, Centex management blamed speculators looking to quickly flip their homes for much of the current inventory accumulation in the U.S. housing market.

Total single-family housing inventories

rose to 6.6 months of supply in June, the highest level since July 1997, the National Association of Realtors said Tuesday.

Centex said it is using incentives to increase sales in markets where oversupply is an issue. By also reducing overall land purchases and walking away from land option contracts in overheated markets -- particularly California -- the company is emphasizing cash generation and a clean balance sheet.

The increased use of sales incentives helped lead to a 360-basis-point drop in Centex's homebuilding operating margin during the fiscal first quarter. The company also recorded a $36 million write-off of land option deposits and pre-acquisition costs.

For the fiscal year ending next March, Centex expects earnings of $7 a share. That comes after the company already lowered its guidance in April to $8.50 to $10 a share, from the previous forecast of $10.75 to $11.25. Analysts currently expect fiscal 2007 earnings of $7.30 a share.

Centex also projected second-quarter earnings of $1.40 a share, well below analysts' forecast of $1.74.

Centex expects to generate more than $500 million of free cash flow in fiscal 2007, weighted toward the end of the year.

That cash will be used for share buybacks, acquisitions and land purchases as the opportunities present themselves, management said.

The company said it isn't seeing opportunities to aggressively invest in land, with the exception of markets in Texas, North Carolina, and the Pacific Northwest, which have had good traffic and relatively strong orders.

Centex shares rose $1.15, or 2.4%, to $48.21 in afternoon trading Tuesday. Other builders also got a slight boost.

Pulte Homes

(PHM) - Get Free Report

, which reports Wednesday, rose 79 cents, or 2.8% to $29.50.