I must admit to suffering another case of homebuilding befuddlement. Two major builders, Lennar (NYSE: LEN) and Ryland (NYSE: RYL), have reported the results for their most recent quarters.
Directionally, the results were the same -- down, of course -- and differed by degrees, but the market Thursday added nearly 9% to Lennar's valuation and cut 2% from Ryland's.
So let's lift the hood on the companies' reports and see if we can determine "why" the differing treatment.
Lennar up first
Lennar reported a loss of $1.25 billion, or $7.92 a share, compared to a loss of $1.24 a share for the same quarter a year ago. The most recent quarter was hit by nearly $1.2 billion in losses on land sales, most of which related to the company's joint venture with Morgan Stanley (NYSE: MS), wherein Lennar sold about 11,000 lots, carried on its books at $1.3 billion, for about $0.40 on the dollar.
Looking at the company's homebuilding activity for the quarter, new home orders and deliveries were both off by about 50% compared to last year. And just as importantly from my perspective, since it indicates the success that buyers are having obtaining financing and unloading their existing homes, the cancellation rate was 33%.
Did CEO Stuart Miller utter some magic words to wow investors? He did express optimism that the Fed's latest rate reduction and the recent plans by the Federal government would "have a stabilizing impact on the housing market ... "
But he also said, "As we look ahead to 2008, we are not expecting market conditions to improve, and perhaps might continue to decline in the near term." Throw in some remarks about a strengthened balance sheet and a right-sized business, and for the life of me, I don't get anything from Miller's comments that I can translate to, "Eureka! All is well!"
And next Ryland
For its part, Ryland reported a loss of $201.9 million, or $4.80 a share, versus earnings (imagine that) of $1.98 a share a year ago. Its charges and write-offs totaled $317.9 million in the quarter. The company said that, without charges and write-offs, its income for the quarter would have amounted to $0.53 a share.
On the activity side, Ryland's declines were less severe than Lennar's. Its 3,061 closings represented a 30% year-over-year decrease, and its new orders fell by just 7%. The company didn't tell us about its cancellation rate.
That being the case, perhaps we should glance at additional metrics -- that's Wall Streetese for numbers -- to find other differences:
|
Lennar |
Ryland | |
|---|---|---|
|
Revenue |
$2.2 billion |
$854 million |
|
Net debt to total capital |
30.2%* |
34.6% |
|
Credit line balance |
0 |
0 |
|
Gross margin (excluding write-offs) |
12.1% |
13.9% |
|
Year's share price decline |
67% |
45% |
Net debt to total capital simply provides an indication of the percentage of debt (less cash) involved in the total funds raised to run the business. Especially during challenging times, the lower the percentage the better.
Conclusions
I don't know about my Foolish friends, but I detect very little in the companies' results and relative status to explain Thursday's divergent price actions. All in all, however, there are a few observations that can be drawn about the pair and the market's differing reactions:
- There is little difference in balance sheet strength between Lennar and Ryland. Both have reasonably sound debt-to-capital percentages, and neither has any balance on its credit lines.
- With the new attention homebuilders generally have generated since the Fed's latest rate cut, Lennar's greater size and its larger price decline during the past year may have placed the company more directly in investors' crosshairs.
- The market may have reacted positively to Lennar's more adventurous strategic moves, including the Morgan Stanley transaction, assuming that these more draconian steps will benefit the company substantially.
In any event, we'll learn more about the builders and their world when Centex (NYSE: CTX) and Pulte (NYSE: PHM) report next week. In the meantime, with rates down and a widespread belief that many builders just might have hit bottom, Fools and other investors will be difficult to dissuade from nibbling at the group.
But, my Foolish friends, please recall Stuart Miller's caution that homebuilding conditions in 2008 could very well continue to decline. On that basis, never was a combination of extreme caution and saintly patience more appropriate.
Homebuilding, homebuilding, homebuilding:
