March of the Penguins: the Housing Edition
It's that time again for homebuilders -- earnings season. Like March of the Penguins, homebuilders one-by-one are taking to the stage, touting their significantly improved year-over-year results and claiming optimism that the housing sector has found footing. In actuality, what these homebuilders are doing is setting investors up for another cliff-dive off a tall iceberg. Homebuilders have been unable to deliver on expectations since 2006, so what reason is there to believe that'll change now?
Let's take a look at KB Home (NYS: KBH) which followed in the footsteps of Lennar (NYS: LEN) , Meritage Homes (NYS: MTH) , and Ryland Group (NYS: RYL) in reporting "improved" results over the year-ago period.
First off, it's not difficult to improve net orders from levels that were considered to be the lowest on record. The end of the first-time homebuyer's tax credit crunched housing purchases for months and made for some very easy year-on-year comparisons this quarter. Claiming victory here would be like trying to claim you improved your one-mile run time by two full minutes, but you had a broken leg last year. KB did report a 40% jump in net orders for the quarter, but also saw revenue tumble 27% from a year ago. What matters right now is that 27% figure, not potential future revenue.
I'm not sure how the industry is trying to spin this, but the last time I looked, a loss was a loss, regardless of whether revenue improved. KB Home, Ryland, Hovnanian (NYS: HOV) , PulteGroup (NYS: PHM) , and even cash-rich MDC Holdings (NYS: MDC) are hemorrhaging losses by the day. In Hovnanian's case, if the downturn deepens any further, then it's a possibility that the company may even one day go under.
This quarter's loss broke KB's streak of handing shareholders wider than expected losses, but guidance did little to spur confidence. Of even more concern, KB, staunch in its stance to pay a dividend, is down to just $590 million in cash from close to $1 billion just nine months ago. The debt-laden company would be wise to consider a dividend suspension sometime in the near future, keeping in mind that it isn't expected to turn a full-year profit until 2013, and hasn't turned one since 2006.
In a case of the blind leading the deaf (and no I'm not talking about that Gene Wilder and Richard Pryor movie), homebuilders march out every earnings season, declare that housing has found a bottom, and claim that everything is peaches and cream. But, here's the real scoop: The sector is still a mess. Record-low mortgage rates have done nothing to prop up falling home prices, nor have they definitively returned even a third of the homebuilders to profitability. If you want KB Home to continue to be your shepherd penguin, be my guest. As for me, I'll just throw most of the sector on ice for the next few years and come back when the results match homebuilding CEO's lofty expectations.
What's your take on the homebuilding sector? Are investors too bullish, too bearish, or do they have the sector pegged just right. Tell us in the comments section below and consider adding KB Home, as well as your favorite homebuilders, to your watchlist to keep track of the latest news coming out of the sector.
At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. Motley Fool newsletter services have recommended buying shares of MDC Holdings and Meritage Homes. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that'll always put an ethical roof over your head.
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