) -- The big question for the homebuilding sector in 2010 is when -- or if -- the public homebuilders will return to profitability.
But don't expect an answer to the question tomorrow when
reports its fourth-quarter and full-year 2009 fiscal earnings.
In the third quarter, Lennar actually took a step in the wrong direction, posting a larger loss than it had in the second quarter 2009 -- 97 cents per share versus a 76 cent-per-share loss. That short-term increased loss level was not much of a mid-year 2009 surprise. The mass foreclosures on the market handicapped homebuilders like Lennar from a competitive standpoint in attracting home buyers.
There is almost no doubt that Lennar will again report a quarterly and full-year loss, but the loss should at least be a step back in the right direction. The Street consensus is that Lennar will report a 48 cent loss per share for the fourth quarter and a fiscal 2009 loss of $3.10 per share.
With no analysts expecting Lennar to return to profitability in the fourth quarter, it is the operating data -- including new orders, cancellation rates and closings -- that may be more important to keep an eye on than the financial-market data.
"The order number is the most important on the call, and the second most important number is the cancellation rate," said FTN Equity Capital Markets analyst Jay McCanless.
McCanless explains that to even begin thinking about Lennar profitability, there needs to be an order backlog rebuild. The only way that can happen is by keeping cancellation rates low, so orders turn into closings. The FTN analyst is estimating a cancellation rate of 20% in the fourth quarter 2009, and the same 20% rate for the first two quarters of 2010. The cancellation rate was more than 32% in the fourth quarter of 2008.
surprised the market with order growth of close to 37% for the fourth quarter, and an increase in closings of 8%. However,
Beazer Homes was pummeled by investors on Wednesday for announcing alongside the positive growth that it planned to issue 18 million common shares in a secondary equity offering -- close to 50% of the homebuilder's outstanding share level.
Still, don't expect a new order surprise from Lennar any more than an earnings per share surprise in the fourth quarter. McCanless expects Lennar to post a 20% decline in orders in the fourth quarter. It's not all bad, though. That's less than half the 46% decline in orders in the fourth quarter of 2008 and, for the full year, FTN Equity is estimating a decline of 17.5%, also much better than the full year 2008 new-orders decline of 42.5%.
It is also important to remember that Lennar's fourth quarter ends on Nov. 30, and in the two months prior to that date the uncertainty about the looming expiration of the first-time home buyer tax credit should have negatively influenced new-order volume. FTN doesn't expect new-order growth to turn positive until the second quarter 2010.
That positive turn in new orders could make Lennar profitable by the fourth quarter of 2010, albeit barely. FTN is estimating a fourth-quarter 2010 earnings per share of 3 cents, and while that's not much to write home -- or a homebuilder -- about, it would be the first profitable quarter for Lennar since the first quarter of 2007.
There are encouraging signs from California, too, where home prices have recovered significantly to the benefit of homebuilders, including Lennar,
Existing home sales have recently spiked in California,
and the median home price recently had its first year-over-year gain in 27 months. Approximately 15% of Lennar's neighborhoods are in California. Still,
fears of a double dip in housing prices could muddy the outlook for homebuilders, even if California is better positioned to resist the impact of a double dip than other states.
Ultimately, it's job growth that's essential to a broad recovery in the housing market. Neither a Beazer Homes surprise on Tuesday, or one more quarterly loss from Lennar, will prove as important to the outlook for the homebuilding sector in 2010 as the job market. "If the job market doesn't come back, the double-dip crowd will be right, and no state will be immune from that," McCanless said.
Lennar may be able to navigate the choppy waters better than some peers, making gains in California order growth while selling properties in weaker states at a loss to take advantage of the one-time tax refund. Still, it looks like the Lennar turnaround story will have to wait until year-end 2010, as opposed to the first week of the year.
-- Reported by Eric Rosenbaum in New York.
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