Another day, another homebuilder with a leaky roof.
This time, Centex (NYSE:CTX) is the company hosing down its guidance. The company is now looking for earnings from continuing operations to clock in between $0.65 and $0.75 a share for its September quarter. Analysts were expecting the real estate developer to earn $1.33 a share for the period.
Does it get worse? Of course. No company would provide guidance from "continuing operations" if it didn't have some more bad news to spill. In this case, Centex is being stung with charges in order to write down land valuation assessments, and to cover the money it squandered on options to acquire additional land for projects that it is now abandoning.
The company is correct in walking away from as much undeveloped land as feasible right now. Net orders -- the future lifeblood of any developer -- fell by 28%, to 6,828 homes under contract. If the company's financials are looking this shabby with the 8,525 closings it completed in the latest quarter, just wait until you see how low the bottom line can go if the net new home orders keep shrinking.
I've got to hand it to Centex for not pulling any punches here. In its press release, the company conceded that the record number of order cancellations was due in part to the inability of many homebuyers to sell their existing homes. That's a side of the housing glut you normally don't hear a lot about. Sure, new home prices are out of whack for first-time buyers, but it's just as challenging - and, in some cases, clearly more so -- for folks looking to upgrade or downgrade their present digs. That's some serious juggling going on, and it's only going to make developers like Centex or Pulte (NYSE:PHM) struggle even more as they compete against desperate home-sellers with a quick trigger finger on the markdown button.
This simply validates my springtime warning, when I figured that the worst was yet to be seen in this cyclical space.
"It's always possible that Wall Street analysts aren't being pessimistic enough," I wrote at the time. "Fiscal 2007 estimates for DR Horton (NYSE:DHI) and Centex are higher than their 2006 targets, but reality may have something else in store, given how sentiment has been turning and may continue to turn."
Reality did come crashing down on Centex. Wall Street has already revised its targets, and now we see a bottom-line dip in the future. Last night's news will only make it worse.
As long as the warnings keep coming -- and we already had a case in which Lennar (NYSE:LEN) warned not once but twice in the same month this summer -- it's just not safe to assume a position. Basing your position on dirt cheap P/Es? Don't, because they can inch higher with every profit warning. Basing it on vulture-appetizing price-to-book ratios? Don't, because you'll see the value of assets erode away.
Until the dust settles, don a hard hat, and approach this sector for the eventual turnaround plays only after you see the new housing market start to stabilize.
Bucking the trend to score a great housing deal thanks to the glut of homes on the market? Check out our Home Center before you start hitting the open houses.
Longtime Fool contributor Rick Munarriz has been living in the same place since 1999 -- but did refinance twice when borrowing costs got dirt cheap, only to pay off his home earlier this year. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. T he Fool has a disclosure policy.
