Friday, July 14, 2006

The Consumer is Tapped Out

Aside from the DR Horton news, and homebuilders in general getting whacked, there were at least two companies that had bad news to report this week that may indicate the American consumer does not have as much money to spend this year compared to last year.

Brunswick Corp., a maker of boats, said that boat demand is not as strong as expected and that earnings for the year would have to be reduced. (I said a few months ago here that I thought I saw more boats for sale.)

Also, Polaris, a maker of snowmobiles and ATVs, also said that sales would be weak.

I think that the weak demand for recreational vehicles is partly relective of high gas prices and partly reflective of the reduce ability of consumers to extract equity from their houses to make big ticket purchases.


Anonymous Anonymous said...

UPDATE:Homebldr Shares Drop On Horton News, Analyst Report
July 14, 2006

(Adds comments from UBS analyst Margaret Whelan about valuations beginning in paragraph 8, and updates stock prices.)

By Janet Morrissey

NEW YORK -(Dow Jones)- The nation's home builders were the biggest losers among 100 sectors of the Dow Jones indexes Friday, as jittery investors appeared to react to negative news from D.R. Horton Inc. (DHI) and an analyst's report on the housing industry that compared current housing trends to conditions that led to a crash in the late 1980s.

D.R. Horton, the country's largest builder by sales, issued a statement late Thursday indicating it was battling big inventories in certain markets, a surge in cancellations, write downs on certain land options and a higher use of incentives in order to move sales - all of which would have a negative impact on the company's bottom line. It said it would fall short of Wall Street's expectations in its fiscal third quarter, and it slashed its fiscal-2006 guidance by more than 30%.

The news came only hours after Raymond James issued a report that offered the most dire predictions yet for the home-building industry. In the report, analyst Rick Murray said he believes home-building stocks could fall another 20% to 40% before hitting bottom, and he warned of a startling number of similarities between the current housing environment and the one that led to a crash in the late 1980s. Murray slashed his earnings projections for home builders again; he is now forecasting a 17% decline in 2006 and 45% drop in 2007.

In his report, Murray said a number of factors, such as affordability, inventory levels, orders and the use of incentives and discounting are similar to - or worse than - those seen prior to the 1980s housing crash.

However, others in the industry argued that the report's comparisons and predictions were premature. Fitch Ratings Managing Director Bob Curran said the recession and savings-and-loan debacle were the two key catalysts that drove housing off a cliff in the 1980s - and neither are factors today.

Elliot Eisenberg, a housing policy economist with the National Association of Home Builders, said that as long as the economy remains solid and unemployment remains low, the housing sector shouldn't implode.

Nevertheless, home-building stocks were down across the board Friday, with D.R. Horton and NVR Inc. (NVR) taking the biggest hits, falling 9.4% and 5.8%, respectively. Others declining more than 4% included Beazer Homes USA Inc. (BZH), Centex Corp. (CTX), KB Home (KBH), Meritage Homes (MTH), Pulte Homes Inc. (PHM), and Ryland Group Inc. (RYL).

The group is now trading at about 4.7 times 2006 earnings and 6 times 2007 earnings on average, estimates UBS analyst Margaret Whelan, who tracks 15 builders. The only time the multiple has gone lower was in 2000, when there was a rotation out of cyclical stocks and into tech stocks, and during the 1980s crash, said Whelan. In 2000, she said builders traded at around a 4 multiple.

But with so much uncertainty surrounding the builders' future earnings and with companies constantly ratcheting down their forecasts, it makes it difficult to nail down the group's true multiple. If companies continue to slash earnings forecasts for 2006 and 2007, but still trade around the same price, the multiple would be larger.

When looking at valuation based on book value, homebuilders are currently trading at about 1.2 times book value. Raymond James' Murray said builders have historically traded at about 0.8 times book value during troughs - and traded as low a 0.6 times book value during the late 1980s correction. As a result, he believes the group could fall an additional 20% to 40% before bottoming.

However, Whelan said the situation is different today than it was during past downturns. Historically, the low multiples relative to book value usually reflected big writedowns the companies took on land that had lost value during housing downturns. "(Back then), the builders owned 100% of the land, and now they option more than 50% of it," she said. As a result, the writedowns will not be as severe as they were in the past.

Saturday, July 15, 2006 1:29:00 AM  

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