Healthy Quarterly Reports from Homebuilders may be Short-Lived
The country's top four homebuilders all posted profits in their most recent quarterly earnings report, but with the tax credit gone, analysts predict the bounceback will likely be short-lived, as demand dries up. DR Horton (DHI) added its third consecutive profitable quarter while Michigan-based PulteGroup (PHM) returned to profitability after years of losses as it continues to try to meet its earlier projections of a profitable 2010. Horton said its net income of $50.5m, or $.016 per share, for its fiscal year third quarter (FQ3) 2010. For the FQ309, DR Horton posted a loss of $143.8m, or $0.45 per share. After posting a net loss of $545.3m for the 2009 fiscal year, Horton has posted profits of $42.8m in FQ110 and $11.4m in FQ210. Total net income for the first nine months of the fiscal year was $253.9m, or $0.78 per share, compared to a net loss of $314.9m during the first nine months of the previous fiscal year. In early July, credit rating agency Fitch Ratings upgraded its outlook for the Fort Worth, Texas-based builder, citing its strong liquidity position, improved operating results and what it called moderately stronger prospects for the housing sector this year. Horton's quarterly profit comes despite $30.3m in pre-tax charges for inventory impairments and land option cost write-offs, primarily for communities in Illinois. The company declared a quarterly cash dividend of $0.0375 per share payable on August 26 to stockholders of record on August 16. Homebuilding revenue in FQ310 increased 51% to $1.4bn, from $914.1m FQ309. Homes closed increased 60% to 6,805 homes, from 4,240 homes in the same quarter of fiscal 2009, Horton said. Net sales orders for FQ310 declined 3% to 4,921 homes ($1bn), compared to 5,089 homes ($1.1bn) one year ago. While DR Horton's operations have grown from one year ago, the company's selling, general and administrative (SG&A) expense was $143.2m, an increase of nearly 7% from $134.3m in FQ309. "As we expected, market conditions in the homebuilding industry have become more challenging after the expiration of the tax credit at the end of April. Our net sales orders declined significantly in May and improved modestly in June and July," board chairman Donald R. Horton said in the quarterly report. "However, we will continue to focus on providing affordable homes for the first-time buyer, controlling our costs and contracting for new communities with attractively priced finished lots while maintaining our strong balance sheet," Horton added. In May, Builder magazine ranked Horton number one in its top 100 builders list for 2009, a spot it's held since in every annual ranking the magazine has published on its website, which dates back to 2002. Despite holding the top spot, Horton — like many other builders — were impacted heavily by the housing downturn. Total closings of 18,164 in 2009 were down 24% from 2008 and total revenue of $3.87bn was down 33%. Pulte Homes, the primary homebuilding subsidiary of PulteGroup leapfrogged its way from fourth biggest in 2008 to second in the 2009 rankings, thanks in no large part to its 2009 merger with Centex Corp., which ranked third in 2008. The combined company is larger than Miami-based Lennar (LEN), but still smaller than Horton. The move helped Pulte regain market share that had lost since the early 2000s. Lennar — third on the 2009 list with 11,478 closings — reported net income of $39.7m for its FQ210 that ended May 31. The profit compares to a net loss of $125.2m in the same period one year ago. However, the turnaround was orchestrated by reducing losses, as overall revenue declined nearly 9% year-over-year. While the latest quarterly results show marked improvement for Horton and Pulte, pre-earnings season projections by analysts at Credit Suisse anticipate the growth to be short-lived. Many builders will achieve profitability in Q210 as the higher closings, driven by the tax credit expiration, will lead to better SG&A leverage, but weakness will return in the following quarter as buyer traffic will trail off, leading to a decline in orders of up to 20% for the entire industry. According to the Builder rankings, Pulte Homes had total closings of 15,013 in 2009, a decrease of 29% from 2008. Total revenue was $4.08bn, down 35% from the previous year. For Q210, PulteGroup reported net income of $76m, or $0.20 per share, compared with a prior year net loss of $189m, or $0.74 per share, in Q209. PulteGroup results were impacted by approximately $45m in land and mortgage-related charges, offset by a net benefit from income taxes of $82m. In Q209, charges totaled $130m, partially offset by $16m in benefit from the repurchase of debt. Pre-tax, the company would have reported a $6m loss, impacted by the $45m in charge-offs. For the first half of 2010, PulteGroup reported net income of $64m, or $0.17 per share, compared with a prior year net loss of $704m, or $2.77 per share. Homebuilding revenue was $1.3bn, compared to revenue of $654m one year ago. PulteGroup attributed the increase to quarterly home closings doubling to 5,030 from a year ago. The improvement was impacted by a 4% decrease in average selling price to $251,000. PulteGroup SG&A expense was $147m in Q210, up 29% from $114m in Q209, but down slightly from $151m in Q110. SG&A now accounts for 11.7% of home sales revenue, compared to 17.5% in Q209 and 15.4% in Q1110. "Recent buyer demand has been stable, albeit at very low levels, after the pull back experienced following expiration of the federal tax credit at the end of April," said PulteGroup president and CEO Richard Dugas, Jr. "While reasonable to expect a modest seasonal pick up in the second half of 2010, long-term we believe that any significant housing recovery will require a stronger economy, higher employment and greater overall consumer confidence." Credit Suisse projects the decline in new orders during Q310 will lead to operating losses for the homebuilder sector. Credit Suisse projects only Horton and NVR (NVR) — the parent corporation of building companies Ryan Homes, Fox Ridge Homes and NV Homes, as well as related mortgage and settlement services subsidiaries — will be the only companies to report annual earnings in 2010. When Virginia-based NVR — fourth on the Builder top 100 list with 9,042 closings — reported earnings in late July, the company said it posted net income nearly $71.28m for Q210, on increases in both its building and mortgage origination businesses. Write to Austin Kilgore. The author held no relevant investments.