Homebuilders in a Hole

Weaker new and existing home sales, plus quarterly losses reported by D.R. Horton, Beazer Homes, and Ryland send the stocks to new lows for the year

by David Bogoslaw

Homebuilder stocks took another hit on July 26 after a fresh batch of poor quarterly financial results and new economic data reinforced investors’ concerns about a deepening slump in the U.S. housing market.

Sales of new homes fell 6.6% in June to an annualized rate of 834,000, after a revised 2.2% decline in May to 893,000. The drop was more than three times what was expected and the biggest decrease since January.

Inventory was unchanged from May at 537,000 units, which represents a supply of 7.8 months. The median price of a new home continued to fall to $237,000 from $241,000 the previous month.

The data followed a July 25 report showing that existing home sales fell 3.8% in June to an adjusted annual rate of 5.75 million, lower than expected. This sparked worry that housing would take much longer to recover than people had anticipated.

Wider quarterly losses reported by some homebuilders also attested to further deterioration in the housing market. D.R. Horton (DHI) reported a net loss of $2.62 a share for the fiscal third quarter, nearly triple its $0.93 loss from a year ago, on a 29% drop in revenue.

The company had pre-tax charges of $835.8 million for inventory impairments, $16.2 million for write-offs related to abandoned land option contracts and $425.6 million for goodwill impairment. For the rest of this year, D.R. Horton plans to focus on generating cash, reducing inventory, and paying down outstanding debt to maintain a strong balance sheet.

Beazer Homes USA (BZH) posted a fiscal third quarter loss of $3.20 a share, vs. $2.37 a share in the year-ago period, on 37% lower revenue. The latest results included pre-tax charges totaling $188.5 million for inventory impairments, abandonment of land option contracts and goodwill impairments.

Beazer also opened a new $500 million revolving credit facility, scaling back from a previous facility for $1 billion. On a conference call to discuss the results, the company said it was preparing for static building activity for the remainder of 2007, but hoped to have a need for cash to start building out its backlog of orders sometime next year.

The Atlanta homebuilder said new orders fell 30.2% to 3,055 homes from the year-ago period.

In its second quarter, Ryland Group (RYL) swung to a net loss of $1.25 a share from a profit of $2.03 a share a year ago, but beat the $1.31-a-share loss that Wall Street analysts had projected. Revenue fell 38% to $739.7 million. The latest results included pre-tax charges of $147.1 million for revalued inventory and write-offs.

Pre-announced warnings earlier this month helped Ryland and D.R. Horton shares stand up to some of the selling pressure. Ryland fell 2% to $32.27 and D.R. Horton lost 3.4% to $16.88, while Beazer shares dropped 11.9% to $15.02. All three of them hit a new 52-week low on July 26.

In a July 26 research note, J.P. Morgan Securities attributed the 7% increase in Ryland’s orders in the western U.S. from a year ago to aggressive price discounts and said tighter subprime and Alt-A credit requirements drove a 28% drop in orders in Texas.

The company’s inventory trend is encouraging, however, 18% below the peak in the third quarter of 2006 on solid declines of 15% from a year ago and 6% from the first quarter, J.P. Morgan said.

The charges Ryland took were essentially in-line with those of other homebuilders, and excluding charges, Ryland has maintained a solid level of profitability between 70 and 80 cents a share, compared with near-breakeven results from some of its peers, J.P. Morgan said.

Standard & Poor's said it had low expectations of Ryland’s near-term prospects, given the $80 million in charges it took in the first quarter for asset impairment and goodwill writedowns, and preliminary second-quarter charges of $145 million to $155 million.