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Homebuilders Management Commentary: A Review

Posted: Feb 13, 2009 14:49 PM by Eric Fox

Tickers in this Article: PHM, DHI, CTX, BZH

Conference call season is an effective method of gaining a sense of management mood and outlook regarding the industry. This is particularly important in the homebuilders industry, which has been hit full force by the financial crisis and housing bubble. A review of commentary by management of the large publicly traded homebuilders shows an industry still racked by pessimism, although there are indications that activity and traffic are starting to build. Investors who look beyond the scare headlines may find opportunities in this sector.

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More Pessimism
Donald R. Horton, chairman of D.R. Horton (NYSE:DHI), started the ball rolling and said "Market conditions in the homebuilding industry continued to deteriorate during our first fiscal quarter, characterized by rising foreclosures, high inventory levels of both new and existing homes, increasing unemployment, tight credit for homebuyers and eroding consumer confidence." (Learn more in our Economic Indicators Tutorial.)

Centex (NYSE:CTX) stoked the fire a little more during its call. Chairman and CEO Timothy Eller said "In the third quarter, disruptions in the economy and the credit markets caused unprecedented buyer hesitancy. As unemployment rose and consumer confidence fell, buyers remained firmly on sidelines. As a consequence, our sales were extremely weak truly in the quarter."

Pulte Homes (NYSE:PHM) delivered another blow. CEO Richard Dugas, Jr., said "During the fourth quarter, conditions for the industry got progressively worse. Exceptionally soft demand, combined with continued high foreclosure rates that kept inventory high, meant a further imbalance of supply and demand for housing, thus the very weak market conditions."

Beazer Homes (NYSE:BZH) also made negative comments on the current environment. CEO Ian McCarthy said "The housing industry continues to face the most difficult business conditions in many decades ... exacerbated by continued weakening in the overall economy, characterized by rising unemployment, low levels of consumer confidence and ongoing disruptions in the financial and credit markets." Beazer Homes is arguably in a much weaker financial condition than most of its peers. The company is being investigated by the U.S. Attorney's Office in North Carolina regarding its mortgage origination business.

Government
This poor outlook was not entirely unexpected, as last week the government announced that new home sales fell to a seasonally adjusted annual rate of 555,000 in December. This was the lowest rate since the Commerce Department starting collecting data in 1959.

While this was universally seen as bad news by most observers, it is how the cycle starts to correct itself. As homebuilders adjust to the new demand environment and build fewer houses, inventory will start to correct.

Outlooks By Two Builders More Hopeful
The outlook by two of the four builders discussed above was a little more hopeful. Centex management said that "Sales momentum returned in December, and it carried into January. We sold more homes in December than October and November combined, and January was better than December."

Pulte Homes management had similar comments. "We are thus far experiencing a modest increase in traffic and sign-up paces as compared to the fourth quarter of 2008. In fact, we've seen traffic and sign-up momentum build weekly thus far into 2009."

Tax Credit
Some positive news is on the horizon. The Senate last week included a tax credit for homebuyers in its version of the stimulus bill. The tax credit would be equivalent to 10% of the cost of the house, up to a total of $15,000 for anyone who bought a house within a year of the bill becoming law. The credit would only be for individuals who occupied the house for two years. This would be done to deter speculators. The bill still has to be reconciled with the version passed in the House of Representatives.

Final Word
Listening to management commentary during earnings season is an effective method of gauging demand trends in the industry, something that may give investors an edge provided that they can ignore the depressing media headlines. This is especially true for housing, which is in a deep cyclical trough.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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