Trouble on the Home Front

[HenryTo]

FYI:
--------------------------------------------------------------------------------
Trouble on the Home Front
By Nicholas Yulico
TheStreet.com Staff Reporter
1/25/2006 9:48 AM EST
URL: http://www.thestreet.com/markets/realestate/10263958.html

Homebuilders Centex (CTX:NYSE) and Ryland (RYL:NYSE) both reported strong quarterly earnings, but their new-order numbers, which will drive future growth, look dismal.

Calabasas, Calif.-based Ryland said its net income rose 49% to $162 million, or $3.32 per share, compared to $108.7 million, or $2.17 per share, a year earlier. The results handily beat the consensus $3.12 estimate on First Call.

But Ryland's unit orders fell 5% year-over-year for its latest quarter. The lackluster performance led A.G. Edwards analyst Greg Gieber to cut his rating on Ryland to sell. He also dropped his 2006 EPS estimate to $10.25 from $10.90. In a research note Wednesday morning, Gieber noted that the only area of strength in Ryland's orders came from Texas, where unit sales were up 27%. However, the average selling price in Texas is 36% below the company's average, with equally low gross margins, he said.

"Using our new 2006 EPS estimate, Ryland currently trades at a 7.3 times multiple. That is a 12% premium to the group's current average 2006 multiple of 6.5 times. We don't believe Ryland warrants any premium to the group," Gieber wrote.

Centex, which reported a 30% increase in its quarterly earnings, reported order growth, but it was weaker than analysts expected.

The Dallas-based builder said its new orders rose 4% to 8,128 homes. Sales were strongest in the Southwest, where orders spiked 28% year over year. On the West Coast, orders rose 10%. But orders fell 15% in the Southeast, 8% in the mid-Atlantic and 3% in the Midwest.

"This is not particularly positive to hit only 4%, though we don't know all the details behind it," says Gieber, who was expecting nearly 11% order growth.

Centex said net income rose to $329.3 million, or $2.49 a share, for its fiscal third quarter ending Dec. 31, up from $253.8 million, or $1.91 a share, a year earlier. Excluding discontinued items, Centex posted earnings of $332.7 million, or $2.52 a share. Analysts expected earnings of $2.48 a share, according to Thomson First Call.

Revenue rose 25% to $3.74 billion, shy of analysts forecast of $3.81 billion.

Centex's earnings growth came amid an 18% increase in home closings, which rose to 9,504 units from 8,047, and a 130-basis-point jump in operating margin.

The weak orders will likely be a focus on both companies' conference calls Wednesday morning. Homebuilder Meritage (MTH:NYSE) will also report earnings today at an unspecified time.

The existing home sales data comes out at 10 a.m. EST from the National Association of Realtors.

[HenryTo]

A Beazer bankruptcy (given its significant cash flow problems) could be the catalyst for a "capitulation bottom" that we've been looking for. This is news from November 10th - not sure why we didn't catch this earlier:

http://www.topix.net/content/kri/2007/11/beazer-to-delay-some-payouts

[HenryTo]

Guys,

Let me take a stab at this from a fundamental standpoint and utilizing past US housing trends as a basis, if you don't mind.

There are four measures that we can look at as a bottoming indicator - three of them involve housing activity and the remaining one based on price action. Let us start with the first three:

1) According to GaveKal, the average residential investment as a % of GDP from 1957 to 2007 was about 4.65%. At the most recent peak in late 2005, this % rose to as high as 6.3%. Today, we are at 4.5%, just slightly below the 50-year average. At the last trough in late 1990/early 1991, this % declined to as low as 3.4%.

2) From 1950 to 2007, average housing starts were 1.5 million a year. At the most recent peak in late 2005, housing starts rose to as high as 2.2 million. Latest numbers over the last few months have this number averaging around 1.25 million. At the last trough in late 1990/early 1991, housing starts declined to as low as 900,000.

3) Construction employment as a total of non-farm employment is currently around 5.5%. At the most recent peak in early 2006, this rose to about 5.65%. At the last trough in early 1992, this declined to about 4.2%. Note that this is a lagging indicator, however.

4) Taking 1989 as a baseline (base value = 100), the relative value of the S&P 500 homebuilders index vs. the S&P 500 has fluctuated from 40 (early 2000) to 400 (mid 2005) over the last 18 years. We're just now at about 100, i.e. the baseline. Excluding the period after 2003, the relative value of the S&P 500 homebuilders index vs. the S&P 500 has averaged 100. In other words, from 1989 to 2003, the returns of the homebuilders have been about the same as the returns of the S&P 500.

Taking all the above into account, my guess is that we have not seen the bottom yet. Also, my guess is that we would not see a bottom until we have seen a major bankruptcy in the industry. e.g. Bankruptcy of Worldcom and Global Crossing in 2002, and those of Northwest and Delta airlines in October 2002. The former signaled the bottom of the telecomes and the latter the airlines. When that comes, you will need to just "hold your nose" and buy. For those who don't want to do much fundamental analysis, I would just suggest the XHB.

If I have to guess, I would say at least 25% lower for the XHB and possibly 50%.

Best regards,

Henry

[nodoodahs]

Yep, that's the idea. Let the discretion be in the system design and make the execution as discretion-free as possible.

I'm not tracking the value system or the garp system right now. They tested well, but not quite well enough to make the cut. Maybe I could tweak a value system to make it into the top three, but I'm not actively pushing for it right now.

Fundamental doesn't look at price ratios, so it will not "care" whether the stocks are cheap, just that they meet the other criteria: growth, clean cash flow statements, high ROE, minimum market cap.

Timing doesn't do stock selection.

The other two methods will be up on the new site by the end of the month.

[late edit: it's not just the top three trading systems + a timing system, it's the top system that is lower-turnover and focused primarily on fundamental data, the top system that is aggressive with high turnover, the top system that is global and diversified, and the timing system.]
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[texfly101]

Bill,
Thanks, that sounds very sound....hmmm, did I just do the straight man for you? Anyway, I see where you're going with that and yes, it works. I have noticed that the majority of the system's picks, that they were very fair valued to start and the way that I read it, they all were judged so by the market since they previously had better returns than the market. The system seems to pick fair valued stocks that then can benefit from cash looking to invest...so if real estate shows up, then what the hell, its fair valued and should attract money...dj
_________________
dj

[nodoodahs]

The price ratios to book look cheap now. The problem is, you don't know how accurate the books are, and if they'll still look cheap later, when the books have a bunch of write-downs thrown on them. Of course, the market could be over-reacting ... or we could be over-thinking it.

Keeping with themes of *subjective* value investing ...

Projecting earnings out might help determine "cheapness," but we've got the same book issues, i.e., are the earnings real. I would add that accrual accounting anomalies, earnings quality, and an examination of the cash flow statements would probably tell me to stay away.

A buddy in the industry says "wait 'til 08 and the earnings are building again, buy of the century, etc." Maybe.

For me, I'm gonna stick with a few methods that statistically seem to work, and if a homey comes on the screen of a method I'm using, I will hold my nose and buy. That's the beauty of a method, rather than making subjective judgments. I would think that a hard-core value investor, say, a "Magic Formula" guy, should probably do the same. Run the screen, check some numbers and maybe read the filings for red flags, and if they fit some pre-determined, tested objective criteria, buy.
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[texfly101]

so when does this sector become attractive as value stocks? I don't see it before the credit crunch resolves and consumers have some time to shake their fears of course. How does this compare with sectors like tech after the dot com bubble or airlines after 9/11? It will come back but how much further has it to go? How much time to recover? Maybe, this just might be the area to make some advances if the bear comes out of hibernation?
Bill,
I don't think you have ever had such a great supply of set ups, the last one made me choke on my coffee I laughed so hard...dj
_________________
dj

[nodoodahs]

[dknoester]

From Briefing.com today:

Reuters reports that at the Merrill conference the CEO of Wells Fargo (WFC 32.37, -0.8 said "We have not seen a nationwide decline in housing like this since the Great Depression."

DK

[nodoodahs]

C-S gets my goat, too. 10 cities? Come on! Cap-weighted? Please! Yet, that's what everybody cites ...

OFHEO isn't perfect, the lack of jumbos is the problem there, but in terms of coverage and weighting (unit not capitalization) it's a far more accurate presentation of price trends.

This whole discussion is similar to my dollar rant, there is a trading index that is Euro-centric and it is cited, often for ECONOMIC impact! But the broad trade-based index is almost never used in discussion, despite the fact that is is actually germane to the economic discussion, i.e. it includes Mexico, China, etc.
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[HenryTo]

Bill, I noticed that too.

Not sure why - but my guess is that once their clients (hedge funds, "market makers, " etc,) demand a certain market, they will create it. The main point is that these contracts - for the first time ever - are start to get attention from hedge funds and prop trading desks alike, not to mention trading liquidity that the Case-Shiller Indices can never match. Still too early to tell but this shows promise.

P.S. I just emailed them and asked your question.

[nodoodahs]

I'm calling BS on their report, right here and right now.

Click it, and tell me who's missing from their 25 metro areas.

No TEXAS metro on their list, despite
http://en.wikipedia.org/wiki/List_of_United_States_metropolitan_areas
D/FW and Houston metro being 4 and 6 on the list of largest metro areas in the U.S.

Pretty darn glaring error to leave out two of the top six, in a list of twenty-five. People pay money for this????
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[HenryTo]

Latest "Housing Market Report" from Radar Logic:

http://www.radarlogic.com/research/RPXMonthlyHousingMarketReportforAugust2007.pdf

[HenryTo]

A new kind of housing derivatives, based on Radar Logic's Residential Property Index is now getting a lot of transaction:

http://www.msnbc.msn.com/id/21762164/

Folks can download historical data by directly going to Radar Logic's website:

http://analytics.radarlogic.com/radar-logic-home/historical-data.aspx

thestreet.com has a good article about the recent market action:

http://www.thestreet.com/s/housing-cant-get-leg-up-during-dog-days/newsanalysis/realestate/10389413.html?puc=googlefi

[rffrydr]

How big is 4%? 500,000 homes from last quarter:

http://www.businessweek.com/bwdaily/dnflash/content/oct2007/db20071019_946332.htm?campaign_id=rss_daily
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Slow burn means sloooowwwwwwwwwwwwwww:

http://www.nytimes.com/2007/10/22/business/22market.html?_r=1&ref=business&oref=slogin
_________________
Today is the Tomorrow you worried about Yesterday!