Homebuilding stocks came under pressure Wednesday after one analyst cut his earnings forecast for the group for 2006 and 2007, citing order drops and other negative housing fundamentals that he says not even the spring selling season can save. In a research note, Susquehanna Financial Group analyst Stephen East wrote, "We distinctly are not in the camp that the sky is falling -- but it is pretty overcast right now. "We have discussed many times that we believe we are in that transition phase from hyper-growth to sustainable growth, and that the phase would be painful. Well, it is painful, and much like the teenage years, it is just a phase that all must endure. Unfortunately for those banking on a spring selling-season rescue, the transition is in place and we do not see it reversing just because the weather warmed up and the flowers bloomed," East wrote. East's concern is that builders' difficulties over the last three months -- many have reported disappointing new-order numbers -- show a changed level of housing demand that is not yet reflected in Street estimates. He also notes that interest rates could move up more than expected. East believes homebuilder stocks have a Fed funds rate of 5% priced in; however, he said he isn't sure if a 5.25% or 5.5% level is priced in. East downgraded Centex ( CTX) from positive to neutral, saying the company will have difficulty growing since it is less aggressive than many of its competitors. "Its model is highlighted by broad geographic diversity, dominance in few markets and a deliberate decision process that makes it somewhat slower than those more-aggressive peers," he wrote. East dropped his fiscal 2007 EPS estimate on Centex to $10.37 from $11. He believes orders will slow and margins will shrink, thus making the company's earnings guidance of $10.75 to $11.25, as well as Wall Street's estimate of $10.81, no longer achievable.
East cut his earnings estimates for all builders for 2006 and 2007. Homebuilding shares fell slightly, with Centex dropping 1.7% to $62.98. East kept his positive rating on three builders: D.R. Horton ( DHI), KB Home ( KBH) and Meritage ( MTH). For D.R. Horton, he expects fiscal 2006 EPS of $5.31, down from an earlier projection of $5.62. This implies 14.8% growth. He expects fiscal 2007 EPS of $5.93, down from his previous estimate of $6.48. For KB Home, East cut his fiscal 2006 EPS estimate to $11.37 from $11.95. This implies 19.4% growth. For 2007, he expects earnings of $13.08 a share, vs. his previous forecast of $14.25. At Meritage, he expects 2006 EPS of $11.20, just slightly below the company's guidance of $11.25 to $11.50. This suggests 17.3% growth. For 2007, he expects earnings of $12.32 a share, compared with his previous $12.92 estimate. Among other builders, East expects 2006 EPS of $9.20 from Lennar ( LEN), down from the previous $9.35 estimate. At Pulte ( PHM), he lowered his 2006 EPS estimate to $5.72 from $6.02. East cut his earnings estimate for Ryland ( RYL) to $9.76 from $10.26, and lowered his forecast for Toll Brothers ( TOL) to $5.02 a share from his prior $5.16 estimate.