Homebuilder Losers: Horton Hears a Boo

NEW YORK ( TheStreet) -- There was a "for sale" sign up across the homebuilding sector today, as investors exacted revenge on release of weak earnings from the nation's largest homebuilder, D.R. Horton ( DHI) on Friday morning.

By mid-afternoon, D.R. Horton was down more than 15% for the day, the largest percentage loss on the NYSE.

The $0.73 loss per share, far worse than expected by the Street -- and resulting from larger impairments than many had projected -- sent shares across the sector tumbling. Even worse, the freefall came just two weeks after preliminary fourth quarter and year-end results from luxury builder Toll Brothers ( TOL) had breathed a little life into the homebuilding industry.

If there is a silver lining in the smack given to the sector by investors, it's this: even as the D.R. Horton numbers gave investors the jitters, most of the stocks did not drop as much as they had gained from the Toll Brothers spike two weeks prior to today. They may not be winners at week-end, but they were losers to a lesser degree thanks to the positive numbers from Toll Brother, which led a possibly unjustified rally.
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"There was a massive positive reaction to the Toll earnings, and by and large the lift from Toll was bigger than today's sell-off," said Michael Widner, analyst at Stifel Nicolaus Equity Research. Since builders had become a place to put money in the past few weeks, they became a good beta trade, which was much in evidence today, Widner explained.

Most homebuilding stocks had hit a three-month trough at the beginning of November. Meritage Homes ( MHO), for example, began the month at $17.68, jumped to $20.29 as a result of the "Toll Wind," and was trading at $18.05 in the afternoon session on Friday. Lennar ( LEN) started off the month trading at $12.59, rode Toll to $15.12 on the 11th, before coming back to $13.58 on Friday afternoon.

Indeed, most analysts believe that overall conditions don't look very different from the beginning of the month. The bump given by Toll Brothers to the entire industry was probably overdone, and so any residual gains held onto by homebuilding shares even after the D.R. Horton-led tumble is in some respects, a positive. Given the fact that this week also featured grim reports on housing starts and mortgage delinquencies, without the Toll spike things could have been much worse.

"Many were too bullish to begin with," Stifel Nicolaus' Widner said.

Were the D.R. Horton earnings as bad as the massive sell-off suggests? The bad news was that the impairment-related impact to earnings was larger than many expected -- and the largest the homebuilder had taken all year -- and the company was still much more defensively positioned with its cash than some analysts had projected.

Indeed, given its relative balance sheet health, analysts had expected more use of cash to trigger a turnaround, but in the numbers and on the conference call with management today, the company clearly presented a picture of a continued defensive posture, according to analysts. "They made it clear that they don't plan on spending the cash to build ahead of the market," Widner said.

Still, putting to the side the impairment aspect of the earnings, results for revenue-versus-consensus and profit margins-versus-consensus were basically in line with expectations, and order volumes were actually much stronger than anticipated.

Credit Suisse ( CS) analysts noted in a research piece today that the order volume increase of 26% smashed its estimate of negative 2%. Still, Credit Suisse has the stock at Underperform with a target of $7.50. Stifel Nicolaus has its target at $9.2. After its 15% tumble today to $10.44, Widner noted D.R. has moved in much closer range of the Stifel Nicolaus target.

If Friday, in fact, represented one of the worst days in homebuilder recent history, maybe it is a date to remember. "D.R. Horton was non-committal on just about everything but saying that the worst was behind them," Widner noted.

Or maybe more accurately, the worst would be behind them by the end of trading Friday.

As for the actual sector winners at week-end, NVR ( NVR), the largest market cap company in the sector, was the only stock trading up on late-afternoon Friday, with an increase of 2% to $670.

-- Reported by Eric Rosenbaum in New York

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