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Investors drove up shares of the major U.S. homebuilders Oct. 10 after JP Morgan upgraded DR Horton (DHI), Toll Brothers (TOL), and Standard Pacific (SPF), citing stabilized inventories, while the Dallas Fed president suggested fears of a housing correction were overblown.
"While pricing, orders, and starts may still show negative trends in the near-term, we believe inventories – the leading driver of the market's pullback, in our view, as well as our prior cautious stance – have begun to stabilize, and in turn should drive a market recovery," the bank said Oct. 10 in a research report.
On the same day, in a question-and-answer session after a speech in London, Dallas Federal Reserve president Richard Fisher downplayed risks of a housing market correction, which he said was one of the "most over-anticipated in history."
The buying came despite weak outlooks from two major players. KB Home said its third-quarter net income would be about 32% lower because of the market's weakness, while DR Horton reported orders for fewer homes and more cancellations during the three months ended Sept. 30.
Shares of DR Horton gained 4% to $24.79; Toll Brothers rose 4.8% to $30.20 and Standard Pacific was up 5.1% to $26.65. KB shares rose 2.2% to $45.78, up from a 52-week low of $37.89 in mid July. The stock hit a 52-week high of $81.99 in January.
The buying Tuesday spread to other homebuilders: Pulte Homes (PHM) rose 3.2% to $34.06; Centex was up 2.5% to $55.10; Lennar (LEN) gained 2% to $47.10; and Hovnanian Enterprises (HOV) rose 3.9% to $31.79. The Philadelphia Housing Sector Index rose more than 2.5%, with all 20 components rising in midday trading.
Los Angeles-based KB Home also said it would delay reporting its results because it needs more time to complete an ongoing investigation into past stock option grants.
KB estimates that its third quarter net income will fall from $227.5 million, or $2.55 per share, in the third quarter of 2005 to $155.3 million, or $1.93, in the same period of 2006. Still, the company's total revenues for the third quarter reached $2.67 billion, an increase of 6% from $2.53 billion in the year-earlier quarter. Unit deliveries fell during the third quarter, while housing continued selling for higher prices.
Wall Street is expecting KB to earn $1.88 per share, according to Reuters data.
Texas-based DR Horton, which builds primarily in the Mid-Atlantic, Midwest, Southeast, Southwest and West, said its net sales orders for the quarter amounted to 10,430 homes, or $2.5 billion, compared to 13,950 homes, or $3.8 billion, during the same period of 2005.
"The current selling conditions in the homebuilding industry continue to be challenging, with higher than normal cancellation rates and increased use of sales incentives in many of our markets," Chairman Donald R. Horton said in a press release Oct. 10.
DR Horton's cancellation rate - the number of home orders cancelled divided by the gross number sold - for the fourth quarter was 40%, compared to 29% in the third quarter of 2006. The company plans to release earnings Nov. 14, before the market opens. Analysts are expecting profit of 68 cents a share, according to Reuters.
KB Home warned that its delay in filing the Form 10-Q could make it default on credit agreements. It expects to receive extensions to its deadlines soon, though. The company's results for the three and nine month periods ended Aug. 31 will likely change. It has reached "a preliminary conclusion that the actual measurement dates for financial accounting purposes of certain stock option grants likely differ from the recorded grant dates," KB Home said in a filing with the Securities and Exchange Commission dated Oct. 10. Related amounts remain to be determined.
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