I don't think it came as a surprise to anyone that Lennar (NYSE:LEN) lowered its forecast for the fourth quarter Tuesday. Well, scratch that. Maybe one person: UBS analyst Margaret Whelan lowered her 2007 estimate from $4.40 a share to $2.40, which smacks to me of closing the barn door after the horse has escaped.
After all, the homebuilders such as KB Homes (NYSE:KBH), Toll (NYSE:TOL), DR Horton (NYSE:DHI), Centex (NYSE:CTX), and Pulte (NYSE:PHM) have been absolutely killed over the last year amid a slowing housing market, a trend that looks likely to continue for the foreseeable future. The market expects bad news, and so far, the homebuilders have delivered in spades. Surely, though, there must be a point when investors scream "Enough!" and search for values in the battered sector?
With that in mind, Lennar actually reported better numbers than most of its brethren, as revenues climbed 20% to $4.2 billion and orders dropped only 5% year over year, when typical drops have been seen in the 20%-50% range. The company has faced criticism from rivals over adopting a rather cash-focused strategy, reducing inventory via heavy use of incentives and discounts, as well as using "even flow" production management (where the company only builds a new home as it closes one out in inventory).
To this Fool, it makes sense if the market is declining. Why not get what you can for the product before it declines further? To do otherwise might be considered pure speculation on when the market may rebound after a long boom, and as we all know, one prominent homebuilder CEO's predictions are worth diddly squat.
Many market observers and presumably anxious value investors have been awaiting the fabled "bottom" in the housing market to scoop up the builders as a classic deep value/cyclical turnaround play. With numerous indicators from housing starts, to backlog and inventory levels, to interest rates and employment trends, the wealth of data available makes it tempting for the individual investor to try and predict the perfect bottom and ultimate purchasing opportunity. From my perspective, it's an impossible task and serves as a distraction from the real question that investors should be asking: What type of margin of safety can I obtain now from investing in select homebuilders?
It seems to me that some homebuilders such as MDC Holdings (NYSE:MDC) look fairly valued, with P/Es in the 9-10 range even when assuming earnings return to 2001 levels. If the market never hits those levels, there could be some upside for investors. While Lennar doesn't look quite that cheap under the same method, its savvy approach to the housing slowdown gains some points with this Fool. After all, value investors often obtain their best returns when the future is most uncertain, and homebuilders certainly qualify at present.
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Fool contributor Stephen Ellis doesn't hold shares in any companies mentioned. You can see his holdings for yourself . The Motley Fool has a disclosure policy .
