Lennar’s Earnings Will Gross You Out

Have you heard things are looking dire on the housing front? Last night on CNBC's Fast Money several webcam interviews painted a bleak picture. In Florida, it would seem, Open House means Empty House. Nobody is even showing up to tour home listings on the weekends.

Lennar's (LEN-NYSE) earnings today were worse than expected and the stock is printing a fresh 52-low. The second-quarter loss of $0.22 a share was below the consensus estimate of a $0.05 profit. These results exclude $329.1 million in write-offs, or $1.55 a share.

Results were atrocious across the board. Revenues declined 37% year over year, while deliveries dropped 28%. New orders dived 31%, while cancellations surged 29%. Meanwhile, the backlog dollar value fell 56%. The company also experienced a 7% decrease in the average sales price of homes delivered in 2007.

The company was pegged to earn 25 cents a share in the current quarter. That has been revised down:

“The housing market has continued to deteriorate throughout the second quarter. The supply of new and existing homes has continued to increase resulting in declining home prices across our markets. We have continued to adjust pricing to meet today’s market conditions. As we look to our third quarter and the remainder of 2007, we continue to see weak, and perhaps deteriorating, market conditions. Given uncertain market conditions, we continue to lack visibility as to future results, but we currently expect to be in a loss position in our third quarter.”

Wayne Nef has has been particularly prescient on the builders. Here is his take on the situation:

I continue to believe it is too early to jump into the homebuilders here. Eight out of the 13 hombuilders I track are now trading below 1x book now, however I do not believe they have yet hit their trough valuations.  Two problems exist here.

1) The price to book multiples, while below 1x, remain well above trough multiples in most cases.

2) Book value is a moving target at this juncture.

As LEN’s $329.1 million charge attests to, the homebuilders are taking large charges to get pre-acquisition land costs and option deposits off of their books. LEN’s write-off is not unique and is likely not a one-time deal.  These charges impact the book value calculation, as do the losses the companies are reporting.  The consensus book value estimate declined over the past three months for 10 out of 13 homebuilders (HOV, SPF, NVR, WCI, TOL, DHI, BZH, RYL, LEN, and PHM). I expect this trend to continue going forward and to put further pressure on the stock prices of homebuilders.

As LEN noted in its release, market conditions continue to deteriorate. Inventories of homes on the market are rising and prices are dropping. Neither factor is a positive for the homebuilders.  Moreover, mortgage rates are rising and funds holding mortgage-backed securities are under increasing pressure (ie. the problems we just saw at the Bear Stearns hedge fund). Going forward, look for problems to appear in the other sectors I mention in my Thanksgiving thought piece. The housing market does not exist in a vacuum!  Sniper Research

If that does not depress you this headline from Bill Gross will:

CONTAGION MAY BE FOUND IN SUBPRIME MORTGAGE RESETS AND THEIR EFFECT ON HOME PRICES

The right places to look for contagion are therefore not in the white-washed Bear Stearns hedge funds, but in the subprime resets to come and the ultimate effect they will have on the prices of homes – the collateral that’s so critical in this asset-backed, and therefore interest-sensitive financed-based economy of 2007 and beyond. Bill Gross

Looking for Contagion in All the Wrong Places
PIMCO Market Letter--July 2007
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The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No position in securities mentioned

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