Beazer's Cloudy Future

Any bit of sunshine analysts might have been hoping for in housing -- after Ryland (NYSE: RYL  ) posted depressed but better than expected results the other day -- may have been dashed with Beazer Homes' (NYSE: BZH  ) first-quarter earnings report.

Ryland was one of the first homebuilders to report quarterly results that included the month of December, and Beazer did so as well. CEO Ian McCarthy noted that "Most markets across the country continue to experience lower levels of demand for new homes, high cancellation rates and significant levels of discounting." Closings fell 30%, while new orders dropped 54% from last year. Beazer's cancellations were also at 43%, which means they actually improved from the 57% recorded in the fourth quarter, but that could have been the result of the heavy discounts Beazer ended up giving to customers, discounts that ended up affecting operating margins. You can see all the data in my Fool by Numbers article.

Like Toll Brothers (NYSE: TOL  ) , Hovnanian (NYSE: HOV  ) , and most other builders, Beazer continued to write off significant amounts of inventory markdowns, nearly $95 million worth in this quarter. As the company realizes it is unable to sell its homes at the prices they're listed at, the remaining houses end up being marked down.

Beazer wants to point out that without the write-offs, adjusted net income was $15.9 million, or $0.41 per share. However, even though homebuilders across the board are taking big baths in their markdowns now, it will help improve their profitability later on. Moreover, if there is a recovery later on this year and this marked down inventory is still there, they could very well end up selling many of the homes at a higher price, producing more profits, and making their books look better than they otherwise would be.

The company reported that Florida's housing market has been the worst, with orders down a whopping 86% from last year. That market has comprised 12% of Beazer's closings for the past few years but fell to just 9% in the last quarter. WCI Communities (NYSE: WCI  ) , a builder specializing in Florida area homes, has felt the pinch more than others, and will write off as much as $120 million, though its depressed valuation has attracted a number of high-profile investors, including corporate raider/activist Carl Icahn and the Bill & Melinda Gates Foundation.

The next-biggest losses appeared in Beazer's largest market, the west (comprised of Arizona, New Mexico, California, and Nevada), which saw a 59% drop-off in new orders. In 2005, that segment had contributed 31% of the total number of closings to Beazer, but that has since dropped to 27% of the total. The mid-Atlantic region, which encompasses a number of states in the Northeast, suffered the least devastating declines -- only 17% -- undoubtedly because of the unseasonably warm weather that has been experienced so far. (Not including today, brrrr!)

In short, the soft landing continues to be hard for homebuilders, and Beazer has tumbled harder than some. Nor is there any let-up on the horizon. McCarthy said he has yet to see any meaningful evidence of a sustainable recovery, and even the National Association of Realtors -- which tends to put on rose-colored glasses for every housing report -- was dour, reporting that existing home sales fell by the largest amount in 17 years. Still, it couldn't help but try to sound a hopeful note when its chief economist said, "With fingers and toes crossed, it appears that we have hit bottom in the existing home market."

That seems like wishful thinking. While Beazer hopes the spring quarter shows more robust results, it has lowered guidance for the full year to $1.25 to $1.50 per share, before any write-offs, which means things will probably look a lot worse come year's end. That number, though, also had analysts breaking out their erasers, since they had forecast earnings nearly double that number at $2.47 per share.

That's performance that even the most optimistic Realtor can't put a healthy pink shade on.

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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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