Homebuilder Stocks: Behind the Numbers

(Homebuilder stocks earnings article updated with Hovnanian Enterprises results.)

NEW YORK ( TheStreet) -- Homebuilders have been under pressure for some time as the housing market continues to struggle to regain its footing.
New Homes

Data released last month showed sales of newly built homes unexpectedly fell 8.1% in October to a weaker-than-expected annual rate of 283,000 , after rebounding in September. Many industry watchers agree a true rebound is still a ways off. New-home sales are expected to have risen to an annualized rate of 300,000 in November.

The sharp year-over-year decline indicates there was no major rebound, said Douglas S. Roberts, chief investment strategist for Channel Capital Research.

The SPDR S&P Homebuilders ( XHB), an exchange-traded fund that tracks the homebuilder sector, remains 61.9% off its peak of $46.08 in early 2006. The iShares Dow Jones US Home Construction ( ITB) ETF remains 73.5% off its peak of $50.10 in the spring of 2006.

Roberts said September's big month-over-month percentage jump in new-home sales -- as well as the 10% jump in September's existing-home sales -- is due in part to home sales that went under contract over the summer when homebuyers rushed to take advantage of federal tax credits . Those sales weren't closed until September. A number of those sales were likely families with children who wanted to move over the summer rather than have their kids switch schools mid-school year, he said.

Roberts added that home inventories are likely even larger than the government was able to report, pointing to a "shadow inventory" of homes owners would like to sell but have kept off, or taken off, the market because they don't think the houses will sell.

Despite September's better-than-expected rebound, the month's existing-home sales data was the third-worst rate on record and 19.1% below year-earlier levels when first-time homebuyers took advantage of the federal tax credits . Sales of previously occupied homes fell 2.2% in October to a slightly better-than-expected seasonally adjusted annual rate of 4.43 million units

Stabilization in home sales -- newly built or previously occupied -- may not lead to a rebound in the overall housing market given the "overhang of existing homes from foreclosures," Roberts said. "A foreclosure moratorium doesn't solve the issue, it just drags out the problem."

Taking all this into account, here is a roundup of homebuilder earnings from the third quarter along with analyst commentary on where the sector is headed.

Hovnanian Enterprises

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Red Bank, N.J.-based Hovnanian Enterprises ( HOV) narrowed its quarterly losses in its fiscal fourth quarter, ended Oct. 31 but said it sold 13% fewer homes in the period.

Excluding joint ventures, it sold 1,078 homes, while completed sales fell almost 17% year-over-year to 1,204. The average price of its holds fell 12% to $261,530.

Hovnanian's contract cancellation rates, excluding unconsolidated joint ventures, was flat year-over-year at 24%. Contract backlog at the end of its fiscal year, excluding unconsolidated joint ventures, was 1,249 homes with a sales value of $370.8 million, 30% and 34% lower, respectively, compared with year-earlier results.

"In spite of strong long-term demographics, the current housing market remains quite challenging," said CEO Ara K. Hovnanian. "The combination of a lackluster job market and high foreclosure activity is clearly having a dampening effect on the housing market. The only silver lining is that we continue to find land acquisition opportunities which we believe will yield appropriate returns at today's home prices and sales paces."

"Even without a general housing recovery, we are optimistic that as the percentage of deliveries from newly identified communities increases, our overall performance should continue to improve," the CEO added.

Quarterly revenue decreased 19.3% to $353 million, from $437.4 million in the fourth quarter last year.

Net losses narrowed to $132.1 million, or $1.68 per share, from $250.8 million, or $3.21 per share.

Analysts' consensus call was for a loss of 66 cents a share on revenue of $288.1 million.

" Hovnanian continues to lead the sector with the highest impairment charges as a percentage of inventory owned, and it now has written off 47% of its total inventory value," noted Vicki Bryan, senior high yield analyst at Gimme Credit. "Without additional big tax refunds, which are unlikely, the company could burn through its available cash in two years."

Toll Brothers

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Toll Brothers ( TOL) posted better-than-expected results for its fiscal fourth quarter, returning to profitability thanks to a hefty tax benefit.


The luxury homebuilder said net earnings in the recent quarter came to $50.5 million, or 30 cents per share, compared with a year-earlier net loss of $111.4 million, or 68 cents loss per share.

Analysts' consensus call had been for Toll Brothers to book a fourth-quarter loss of $10.2 million, or 8 cents loss per share.

Despite the earnings beat, investors bid Toll Brothers shares 0.9% lower in premarket trading Thursday.

The builder's surprise profit came as the homebuilder benefited from a $59.9 million tax benefit in the quarter. In the year-earlier quarter Toll Brothers suffered a tax expense of $4.7 million.

Toll Brothers' quarterly revenue decreased by 17.3% to $402.6 million, from $486.6 million, but the top-line figure still managed to top Wall Street's expectations for revenue of $393.8 million.

Homebuilding deliveries of 700 units in the quarter fell 19% year-over-year.

Signed net contracts of $315.3 million and 558 units dropped 27% in both dollars and units compared with Toll Brothers' fiscal fourth quarter of 2009.

CEO Douglas C. Yearley Jr. conceded it had been another challenging year for Toll Brothers as the homebuilding sector struggled with waning demand and a still-unhealthy housing market.

"The persistent drag of high unemployment, reduced home equity, weak consumer confidence and frustration with the nation's economic and political climate outweighed the appeal of historic low interest rates and tremendous home affordability," he said. "Many of our clients remain on the sidelines waiting for clearer signs that the economy is on the road to recovery," the CEO added.

D.R. Horton

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D.R. Horton ( DHI) posted narrower-than-expected fiscal-fourth quarter losses as the homebuilder booked fewer write-downs on the value of its portfolio.

D.R. Horton's quarterly loss of 3 cents per share came in a penny ahead of expectations, compared with year-earlier loss of 74 cents per share. Revenue slipped 8.3% to $925.7 million. Top-line results also beat analysts' consensus call.

Chairman Donald R. Horton said that "As we expected, market conditions in the homebuilding industry have been even more challenging after the expiration of the tax credit at the end of April.

Stifel Nicolaus analyst Michael Widner maintained a hold rating on D.R. Horton shares following its earnings release, and reiterated his modest concerns about the homebuilder's relative valuation to the group. He noted that the builder's operating results came in ahead of his expectations, offset by higher impairment charges. Widner pointed out that Horton's stock was up nearly 16% since November of last year, while the rest of the builders are up 10.4%, on average.

"We believe expectations may have gotten a bit ahead of Horton and while we see results as solid across the board the valuation has separated from the pack somewhat over the past ten days and we find it modestly vulnerable here," he noted.

Standard & Poor's Equity Research homebuilders analyst Ken Leon maintained a sell rating on Horton shares, and lowered his fiscal 2011 earnings per share estimate by 20 cents to 45 cents.

Horton said it expects to sell fewer homes in fiscal 2011 than it did in fiscal 2010. In the recent quarter, Horton sold 3,979 homes, 20.5% fewer homes than it sold in the year-earlier quarter. The company's backlog of homes under contract at the end of the quarter was 4,128, valued at $850.8 million, compared with a backlog of 5,628 homes, valued at $1.1 billion, in the end of the fourth quarter last year.

Beazer Homes

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Beazer Homes ( BZH) swung to a fiscal fourth-quarter loss as new orders dropped 20% from a year ago.

Beazer Homes posted a loss of $59.5 million, or 81 cents per share, compared with year-earlier earnings of $33.8 million, or 84 cents per share.

The loss from continuing operations was 78 cents per share, wider than analysts' consensus call for a loss of 46 cents per share.

Revenue fell to $274.8 million in the fourth quarter, down from $365.6 million a year earlier. Analysts projected revenue of $255.3 million.

For the quarter, Beazer reported 1,189 home closings, a drop of nearly 30% from a year ago. New orders fell 20% to 810 homes.

PulteGroup

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PulteGroup ( PHM) beat quarterly expectations despite posting a wider year-over-year loss.

Stifel Nicolaus analyst Michael Widner maintained a hold rating on the stock, noting that "while we see long-term potential for the stock on a normalized earnings basis we expect price-to-book to dominate valuations in the near-term."

The analyst had expected the homebuilder to swing to year-over-year profitability.

The builder posted a loss of $995.1 million, or $2.63 loss per share, compared with a year-earlier loss of $361.4 million, or $1.15 loss per share, in the year-earlier period. Excluding $2.60 per share in impairment charges, adjusted losses were 3 cents per share, topping expectations for a loss of a nickel per share.

Widner was surprised by PulteGroup's goodwill impairment charges, a $655M writedown related to its acquisition of Centex

Revenue slid 2.8% year-over-year to $1.06 billion. Despite the decline, PulteGroup's top-line results also managed to beat analysts' consensus call, which was for sales of $1.04 billion.

Unit closing volumes fell 3%, partially offset by a 5% uptick in average selling prices, to $365,000.

Net new-home orders declined 12% to 3,566 as industry conditions "remain challenging over the near term." PulteGroup's cancellation rate declined to 19.1%, from 22.6% a year earlier. Backlog of 5,345 homes worth $1.4 billion was smaller than a backlog of 8,363 homes valued at $2.2 billion reported in the third quarter last year.

PulteGroup plans to cut selling, general and administrative costs by $100 million in 2011 in an attempt to deal with overall sluggishness in the homebuilding market.

Weyerhaeuser

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Weyerhaeuser ( WY) beat top- and bottom-line expectations with net quarterly earnings of $1.12 billion, or $3.50 per share, compared with break-even results in the year-earlier period. Net revenue jumped 17.7% to $1.66 billion.

>>Weyerhaeuser Beats on Paper Products

Excluding one-time items, adjusted earnings were 25 cents per share, better than the 10 cents per share analysts expected. Analysts typically exclude one-time items when forecasting earnings estimates.

Stronger-than-expected results were attributed to increased demand in cellulose, a key material in papers and fibers.

Analysts from Barclays Capital reiterated an overweight rating on Weyerhaeuser shares following its earnings release, and raised their price target on the stock by $10 to $128.

RBC Capital Markets also reiterated an outperform rating, and raised their price target by $3 to $103.

Research firm Dahlman Rose initiated coverage of Weyerhaeuser earlier in October with a buy rating and $120 price target.

Weyerhaeuser said single-family home sales ticked up sequentially in the third quarter but it expects to book lower profits from its real estate business in the current quarter as the market for new-homes remains weak .

"The overall housing market remains in an uncertain state," said CEO Dan Fulton. "We continue to defer (timber) harvest due to lower log demand."

Weyerhaeuser considers itself a forest products company and is converting into a real estate investment trust in an effort to cut its corporate tax liability. It grows and harvests timber on 22 million acres of forests, manufactures forest products, develops real estate and constructs homes.

Last month Weyerhaeuser declared a $5.6 billion special dividend as part of its REIT conversion, 90% of which was stock, more than doubling its share count to 538 million.

M.D.C. Holdings

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M.D.C. Holdings ( MDC) narrowed its quarterly losses and beat expectations. Quarterly losses came to $10.2 million, or 22 cents per share, compared with year-earlier losses of $32 million, or 69 cents per share.

Revenue of $225.7 million topped expectations for sales of $225.4 million, and represented an 11.1% improvement over year-earlier results.

Home closings increased by 10% to 722 homes though net new orders decreased 22% to 796 homes. M.D.C.'s backlog also declined by 8% to 1,188 homes at the end of the third quarter.

Better-than-expected results were attributed to an increase in home closings, average selling price and home gross margin.

Still, CEO Larry A. Mizel conceded that "the pace of our sales slowed, reflecting a continued low level of demand following the expiration of the federal homebuyer tax credit in the second quarter."

Stifel Nicolaus analyst Michael Widner maintained a hold rating on MDC shares based on its "mixed valuation metrics and no near-term catalysts."

He noted that gross margins of 20.9% topped his expectations for 18%, offset by impairment charges and guidance for weaker fourth-quarter gross margins.

New orders were in line with the analyst's expectations but well below consensus, he said.

M.D.C.'s controlled lot count grew by 9% "but remains among the lightest of the group" at a 3.4-year supply.

"The valuation challenge we have for MDC is even if we assume it achieves the highest market share gains of the group going forward it still looks rich to the group on a normalized EPS basis," Widner noted.

"With home prices sliding again on all major indices, excess supply remaining a significant problem, and weakness in employment and the economy likely to mute household formation for at least another year we remain hard pressed to find drivers for a material improvement in housing in 2011. Still, with the stock trading just off multi-year lows and among the lowest exposure in the group to potential home price declines we see downside risk as fairly limited."

Brookfield Homes

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Brookfield Homes ( BHS) said its quarterly revenue plummeted 24.3% to $74.6 million.

Net losses were $552 million, from a loss of $910 million in the third quarter last year.

Home closings fell sharply to 98 from 192 in the year-earlier quarter. Net new home orders fell even more sharply to 87 from 208.

The backlog of homes at the end of the quarter was 170 with an average selling price of $651,000, compared with a backlog of 326 homes at an average selling price of $468,000 in the year-earlier quarter.

Looking ahead, Brookfield said "we expect demographics, improved consumer confidence and increased employment will result in higher housing starts as the markets slowly recover," conceding that the increase in closings in the first half of this year were a result of homebuyers taking advantage of federal tax credits.

In early October Brookfield Homes entered into a definitive agreement with Brookfield Properties ( BPO), a real estate investment trust , in which the REIT will sell its residential land division for $1.2 billion, combining its residential land development business with the homebuilder.

>>10 REIT Earnings: Behind the Numbers

Ryland Group

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Ryland Group ( RYL) reported a net loss of $29.9 million, or 68 cents per share, far wider than the expected loss of $9.5 million, or 24 cents per share.

Revenue of $212.7 million also came up short of expectations for sales of $214 million and were sharply lower than year-earlier revenue of $327.8 million.

Ryland's average closing price increased to $244,000, from $238,000 in the third quarter last year. New orders decreased by 37.1% to 799 units.

"After an estimated 14% sales decline in 2010, we see 3% growth in 2011 assuming a modest housing recovery," noted Standard & Poor's Equity Research homebuilders analyst Ken Leon.

"With weaker seasonal demand ahead, we are widening our net loss estimate in 2010 to $1.75 loss from 65 cents and 2011's to a 50 cent loss from 10 cents EPS."

The analyst lowered his price target on Ryland shares by $1 to $14.

Stifel Nicolaus analyst Michael Widner maintained a buy rating on the shares with a $19.20 price target based on 1.25 times his $15.24 adjusted book value, "but with the economic and housing outlook murky at best we can only advocate the stock for the patient today."

Meritage Homes

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Meritage Homes ( MTH) swung to year-over-year profitability with net income of $1.2 million, or 4 cents per share, compared with a year-earlier loss of $17.8 million, or 56 cents per share. Excluding pretax charges for real estate-related impairments of $800,000, profits would have been $1.5 million.

Results beat expectations for a loss of $1.6 million, or 7 cents per share. Analysts typically exclude one-time charges when forecasting earnings estimates.

Net home sales in the third quarter were 36% lower than the prior year.

Meritage said its average closing price increased 21% to $275,700 in the quarter, resulting in 1% higher closing revenue on 16% fewer closings. Growth in average closing prices reflected shifts in the mix of sales rather than price appreciation, Meritage said.

CEO Steven J. Hilton said that while Meritage had been moving its product offerings "down the price-spectrum" to lure bargain hunters, the company has "had good success acquiring close-in move-up lots in 'A' locations, which other builders may have passed up" which it can sell at lower prices, "offering tremendous value and opportunity to home buyers."

Margins improved by 600 basis points in the quarter, Hilton added.

S&P's Leon maintained a $15 price target on Meritage shares following its earnings release. He lowered his EPS estimate for 2010 to 20 cents per share, from 30 cents, and 2011 EPS estimate to 25 cents from 70. The consensus call is for 2010 EPS to be 23 cents and for 2011 EPS to be 78 cents.

Leon said the steep decline in quarterly sales was due to " weak demand and lower buyer confidence."

He expects a 2% decline in 2010 sales, but forecast flat sales for 2011.

NVR

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NVR ( NVR) beat top- and bottom-line quarterly earnings expectations even as profits tumbled nearly 40%, and earnings nearly 17% from year-earlier results.

>> NVR Beats as Profits Tumble

NVR posted earnings of $43.9 million, or $7.31 per share, on sales of $676.2 million, easily beating expectations for a profit of $43.1 million, or $6.56 per share, on sales of $660.5 million.

The profit decline came as new orders, settlements and homes sold but not yet settled all declined in the quarter. NVR's cancellation rate rose to 18%, from 14% a year ago.

Even as orders declined, prices for NVR's homes rose. The average new-home order price ticked up to $306,300, from $297,100, and the average settlement price pushed up to $311,100, from $293,300, in the year-earlier quarter.

Following the report, S&P homebuilder analyst Ken Leon maintained a buy rating on NVR shares but lowered his price target on the stock to $720, from $760. He noted that NVR's revenues slid in part because of the springtime expiration of federal tax credits for homebuyers .

"With contract backlog at $1.2 billion, we see revenues rising in the mid single-digits in 2010 and 2011," noted Leon. Modeling on weaker sales, the analyst lowered his 2010 earnings-per-share expectations to $32, from $38, and 2011's eps estimate to $40 from $43 per share. "However, NVR's competitive strengths include its strong balance sheet and communities in non-Sunbelt markets."

Lennar

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Lennar ( LEN) returned to year-over-year profitability when it reported quarterly earnings in late September, helped by higher revenue and a greater number of home deliveries.

>> Lennar Beats on Return to Profitability

Lennar's report of a 15% drop in new-home orders was the most surprising statistic in the builder's report, according to Stifel Nicolaus analyst Michael Widner. New-home orders fell by 15% to 2,624 homes after the expiration of the extended federal tax credit for homebuyers, Lennar said.

Widner "anticipated a much larger orders decline on the other side of the tax credit," estimating a 25% drop in new-home orders, so Lennar's 15% reported decline was softer year-over-year but far better than expected.

Lennar said third-quarter earnings were $30 million, or 16 cents per share, a reversal from a year-earlier loss of $171.6 million, or 97 cents. Analysts expected a profit of $7.1 million, or 5 cents per share.

Revenue rose 14.5% to $825 million, easily beating expectations for sales of $777.5 million.

"During our third quarter, as expected, our sales pace declined as a result of the expiration of the Federal homebuyer tax credit at the end of April," said CEO Stuart Miller.

The average sales price of homes delivered increased to $240,000, from $239,000.

New home deliveries increased 9.4% to 2,909 homes in the quarter from 2,660 homes in the year-earlier quarter. At the same time, the average sales price of homes delivered increased to $240,000 from $239,000 a year earlier.

Sales incentives offered to homebuyers were $30,600 for each home delivered in the quarter, or 11.3% as a percentage of home sales revenue, compared with $42,200 for each home delivered in the same period last year, or 15% as a percentage of home sales revenue.

Lennar said it remains optimistic that its core businesses are on the right track to achieving "sustainable profitability" as the housing market recovers. The company also said that even though high unemployment and foreclosures have continued to present challenges for the national housing market, its communities have been less impacted than the broader market.

KB Home

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KB Home ( KBH) drastically narrowed its quarterly losses, beating expectations, helped by fewer charges and higher revenue.

KB Home posted quarterly losses of $1.4 million, or 2 cents per share, compared with year-earlier losses of $66.1 million, or 87 cents per share. Analysts expected the builder to lose $12.8 million, or 15 cents per share.

>>KB Home Narrows Lowss on Higher Revenue

Revenue jumped 9.3% to $501 million. It was the first time in 4 years that KB Home booked revenue growth.

Inventory impairments and land option contract abandonment charges totaled $3.3 million, sharply lower than year-earlier charges of $47.7 million.

KB Home improved its gross margins and moved from being an industry laggard to in-line with its homebuilder peers, noted Stifel Nicholas analyst Michael Widner. Another key positive in the report was word that KB Home's average sales price rose to $214,200, up 5.6% from year-earlier results, the analyst said, though he pointed out that the gain was mostly a function of heavily concentrated price gains in California.

The average price of a KB Home house sold on the West Coast jumped 14.9% to $353,200.

Widner did add the KB Home's report included some negative aspects, namely a 39% drop in year-over-year order volume, significantly below his expectations. He also cautioned that low third-quarter orders and a smaller backlog had "set up the next two quarters as likely tougher than previously expected for EPS."

M/I Homes

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M/I Homes ( MHO) posted narrower-than-expected quarterly losses of $2.1 million, or 11 cents per share, compared with a year-earlier loss of $21.1 million, $1.14 per share.

Home deliveries decreased 23% year-over-year to 515 even as its operating gross margin of 18.1% reached its highest level in three years.

The backlog of homes at the end of the quarter had a sales value of $188 million, consisting of 722 units with an average sales price of $261,000. That compared with year-earlier backlog value of $263 million made up of 1,060 units with an average sales price of $248,000.

"We experienced sluggish demand for new homes linked to high unemployment rates and low levels of consumer confidence across our markets," said CEO Robert H. Schottenstein. "From a macro standpoint, demand for new homes has been adversely affected by weak and uncertain general economic conditions along with the expiration of the federal homebuyer tax credit."

Despite sluggish demand, M/I Homes' operating gross margin of 18.1% in the recent quarter was the highest level that metric has reached in three years.

-- Written by Miriam Marcus Reimer in New York.

>To contact the writer of this article, click here: Miriam Reimer.

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