Homebuilder Centex (NYSE:CTX) will report Q3 2007 financial results tomorrow, Jan. 23, where it's likely we'll see another homebuilder falling into a state of disrepair.

What analysts say:

  • Buy, sell, or waffle? Considering the climate, some might be surprised that of the 15 analysts covering Centex, six say buy, while eight say hold. Only one says sell.
  • Revenues. What's not surprising is that sales are expected to fall 17%, to $3.09 billion.
  • Earnings. Nor is it a shocker that profits will be plummeting. Analysts expect them to fall from $2.52 per share last year to a $0.70 loss this time around.

What management says:
Considering that management warned everyone last week that this quarter was going to be, well, not so good, the actual announcement should probably have little effect on the stock. Yet the damage is worse than what the analysts were expecting. Although Centex's chairman and CEO, Tim Eller, said the company is "committed to reducing inventory, generating cash and strengthening our balance sheet," it's doing so by taking charges for walking away from land option contracts, from revaluing the land it does own, and from an increase in tax reserves for an ongoing audit.

Closings are down 12%, and sales are down twice that. Needless to say, it's an understatement on Eller's part when he notes that Centex is "navigating through one of the most challenging housing environments in the past 25 years."

What management does:
Centex management has been unnecessarily Pollyanna-ish in how it viewed the decline in the housing market. When it released second-quarter results back in October, it noted that the market was "cyclical" and it was positioned to gain from it -- that's what all the builders are saying -- but it was expecting $0.90 per share in the third quarter and $4 per share for the year, which was significantly down from the $7 per share it had forecast back in the first quarter. That could be why analysts are discounting this, suggesting the company won't earn more than $2.20 per share for the year, and one imagines it could even be worse.

Margin %

09/05

12/05

03/06

06/06

09/06

Gross

13.2

13.6

13.3

12.6

10.6

Op.

13.3

13.7

13.2

12.5

10.5

Net

9.6

9.6

9.0

8.2

6.9
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Centex seems to have had a hard time acknowledging the reality that housing was in a tailspin; it continued to try to sugarcoat the fact that things were bad and getting worse. While it's true that homebuilding is cyclical, it ought to be incumbent upon CEOs to better predict when the market is turning. It's not like they didn't have warning signs.

Although the first quarter showed home closings flattening, while orders were off 21% from the previous year, management was looking for markets to rebound, saying that "demand drivers support industry strength." That was followed by declining revenues in the second quarter, closings falling 7%, and orders falling 29% from the previous year. But it still "believe[d] that the long-term fundamentals remain solid." Apparently, it was obvious to everyone by this quarter that things were not as good as previously supposed.

Undoubtedly, since the other homebuilders were taking hits this quarter, Centex believed it was OK to own up to reality. But because it delayed the inevitable longer than others, it may be that the pain will last here longer, too.

Competitors:

  • D.R. Horton (NYSE:DHI)
  • Pulte Homes (NYSE:PHM)
  • Toll Brothers (NYSE:TOL)
  • Ryland Homes (NYSE:RYL)
  • Lennar (NYSE:LEN)
  • Beazer Homes (NYSE:BZH)

Related Foolishness:

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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.