Homebuilders Face Test After Pulte's Warning

Shares trend lower after the company warns of weakness in Las Vegas.
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Updated from 8:33 a.m. EDT

Homebuilder stocks faced a test Tuesday after

Pulte Homes

(PHM) - Get Report

shook the sector's foundation with some of the sector's first bad news in months.

Pulte said after the bell Monday that it expects third-quarter earnings from continuing operations of $1.95 to $2.05 a share, down from previous guidance of $2 to $2.10 a share. The company cited consumer resistance to price increases in Las Vegas.

Analysts were guarded in the wake of the warning, with Merrill Lynch lowering its 2004 profit forecast to $7.44 a share from $8.84 a share. Still, the brokerage noted that Las Vegas has seen some of the steepest real estate appreciation in the country over the last year, and maintained a buy rating on the stock.

News from other homebuilders Tuesday could also lessen Pulte's impact.

MDC Holdings

(MDC) - Get Report

reported an increase in third-quarter orders, affirmed its earnings outlook for the period and predicted a big earnings beat in the fourth quarter.

Hovnanian

(HOV) - Get Report

reported a 34% increase in the dollar value of its September orders and said its active selling communities totaled 277 at month's end, up from 256 a year ago.

Still, with many of the sector's big names trading near 52-week highs, traders will be looking for any sign Pulte's news heralds the slowdown bears have predicted for years. In recent trading Tuesday, Pulte fell $3.78, or 6.7%, to $52.55. Fellow homebuilder

Ryland

(RYL)

fell $1.30, or 1.5%, to $87.69, while

KB Home

(KBH) - Get Report

lost $80 cents, or 1%, to $80.09.

Among the sector's high-profiles shorts is money manager Doug Kass, a columnist on

TheStreet.com's

sister site,

Street Insight.

Kass argued Tuesday that Pulte's news bodes badly for both the sector and the economy.

"Analysts and stakeholders will likely defend the homebuilders on the basis that the Pulte Homes shortfall is company-specific," Kass wrote. "They will be wrong, as the homebuilders are now a massive short opportunity. The price elasticity expressed by homebuyers in Las Vegas will soon be seen in other formerly hot markets."

For its part, Pulte portrayed its problems as contained to Las Vegas.

"Pulte's Las Vegas operations have raised prices aggressively, with some communities implementing price increases well above the 50% increases experienced in the broader Las Vegas market," said President and Chief Executive Richard J. Dugas Jr.

"Consumer acceptance of these increases at certain price levels has apparently reached a ceiling, suggesting that prices have become higher than what the market will support," he added. "Pulte has already implemented actions to lower local market pricing to better align the company's operations with current market conditions."

Pulte said it now expected full-year earnings from continuing operations of $7.40 to $7.70 a share, compared to previous guidance of $7.80 to $8 a share.

A Thomson First Call consensus estimate had expected third-quarter earnings of $2.12 a share and full-year earnings of $7.83 a share.

Pulte also announced that preliminary signups for the quarter ended Sept. 30 increased about 11% over the same period last year. The company said it experienced "robust" sales during the period in many of its markets including the West region, which showed an increase of 3%, despite weakness at certain price points within its Las Vegas operations.

Pulte's warning cames on a

bad day for homebuilders: The yield on the 10-year Treasury note rose as high as 4.24% on Monday before closing at 4.17%, up from a six-month low of 3.96% hit last week.