Backlog and Market Cap to Debt Ratios for Major Homebuilders

Following up on posts One and Two about homebuilder ratios.

Debt-to-backlog. Having debt that is a higher multiple of backlog (the dollar amount of outstanding orders for homes) is troublesome. Consider that the amount of cash for paying down debt is going to be a fraction of the backlog

Debt-to-market cap. A measure of the amount of financial leverage.


One thing to keep in mind is that the data not consider off-balance sheet debt, so the amount of debt is understated. The understatement is not necessarily equal - certain builders use more joint ventures to control land. Also, certain builders have more contingent liability for their off-balance sheet debt.

Also, significant numbers of orders in the backlogs will probably cancel. Some builders are better than others at converting the backlog into cash.

Homebuilder Ratio Analysis

In September, I put together a ranking of public homebuilders by their debt to backlog, enterprise value to market cap, debt to market cap, and Altman Z-Score ratios.

I am going to update that ranking, but first I wanted to measure its efficacy at predicting changes in stock prices.

This is a scatter plot of the relationship between the debt to market cap ratio on September 18, and the decline in price since then.


Similar scatter plot showing the relationship between price decline and debt to backlog ratio.

Weekend Roundup: Standard Pacific, Dollar Lows, Phoenix Residential Stagnation

Quick facts before the weekend:

• Dollar index hit an all time low today. It has lost about 3% since the September rate cut. I am long Euros through FXE, which is yielding 3.36%.
  
• Someone from a Standard Pacific Homes IP address just did a Google search for "standard pacific bankruptcy." For those of you new to the site, Credit Bubble Stocks does offer continuing coverage of Standard Pacific. I have continually rated SPF a "sell" since March and still own the puts. The homebuilder stocks rallied today on the strength of a 12% rise in orders at NVR. Points:
  
• A 12% rise in orders is not that meaningful. How many will close?
• NVR is the best positioned builder. Their slight strength doesn't imply anything about SPF. They build in practically opposite markets. I bought puts into the SPF and Beazer strength today.
  
• Valley resale market enters holiday slowdown. Matches the projection from my October 3 post, meaning that Phoenix metro has a massive inventory overhang.
  

No Bids for SoCal Land

This is an interview published on the OC Register site with Tom Reimers, executive VP at land broker O’Donnell/Atkins from Irvine.

What’s the market for raw land in SoCal and Orange County today? What’s the outlook?
Tom: In general, the residential raw land market is non-existent. Land values and deal flow for other types of product are more stable right now, but the credit/financing crunch is squeezing those values as well.

How are prices?
Tom: It’s hard to say. With few to no buyers, it’s hard to say what land is worth. There are no transactions to set a benchmark. In some tertiary markets, the land is worthless from a residential development standpoint due to costs to develop being higher than the land value.

Related: Homebuilders Liquidate Assets in Desperation Sales.

Hovnanian spokesman Jeff O'Keefe said the company offered discounts as high as 30 percent.

D.R. Horton also threw in a washer-dryer and $2,500 toward closing costs, Moran said.

``Adding a credit toward closing costs still allows them to show the highest selling price they can,'' Moran said.

Next, Mortgage Slump Hits Home Decor Industry.

At the Annual Furniture Mart, Worried Manufacturers See the Mortgage Slump's Effects.

HIGH POINT, N.C. (AP) -- Doug Schock shook his head in disbelief while gazing at the empty bank of elevators, typically full as they shuttle thousands of buyers between dozens of showrooms filled with the latest styles in sofas, bedroom sets, and dining room tables and chairs.

Debunking Another Absurd Stephen Kim Homebuilder Rally

Wondering why the homebuilders are up huge this week? Surprisingly simple explanation:

NEW YORK (AP) -- Housing stocks rallied for a third consecutive day Wednesday, as sentiment increased that the long-battered shares may have reached a bottom, even if the beleaguered housing market has not. With no industry data to guide them, investors appear to be taking their cue from an analyst who earlier in the week upgraded the entire sector.

Citigroup Global Markets analyst Stephen Kim wrote in a client report Monday he does not foresee the stocks falling much more. However, he does not expect conditions in the industry to improve anytime soon.

"We are not trying to suggest that trends in the homebuilding sector are about to get much better," he said. "It is precisely when things have gotten this bad that the stocks start looking good."

For a moment, I thought I had been transported back in time to December 6, 2006, date of a previous Stephen Kim research report.

Citigroup recommended that investors buy shares of homebuilders now as order trends are expected to turn positive in the first quarter of 2007. "While many wait for an improvement in fundamental data such as prices or inventory to signal an 'entry point' in the stocks, we urge investors to look back to prior cycles, when the group rallied far ahead of fundamentals," Citigroup analyst Stephen Kim said in a research note. The brokerage firm raised its price targets on the following companies:

Pulte Homes Inc. - $45 [now $16.25, off by 64%]
D.R.Horton Inc. - $48 [now $14.84, off by 69%]
Lennar Corp. - $88 [now $25.90, off by 71%]
Centex Corp. - $83 [now $29.28, off by 65%]
Toll Brothers Inc. - $42 [now $22.79, off by 45%]
KB Home - $92 [now $28.60, off by 69%]
MDC Holdings Inc. - $85 [now $43.52, off by 49%]
Ryland Group - $95 [now $25.5, off by 73%]
Beazer Homes USA Inc. - $80 [now $10.08, off by 87%]
Hovnanian Enterprises Inc. - $63 [now $13, off by 79%]
Standard Pacific Corp. - $43 [now $6.24, off by 85%]
Meritage Homes Corp. - $87 [now $16.62, off by 81%]
Technical Olympic USA Inc. - $18 [now $1.94, off by 89%]

Stephen Kim sounds like a guy you should listen to if you want to lose two-thirds of your money.

Here's how the builders have done since he called the bottom on December 6, 2006:


See that tiny blip upwards on the very far left? That was the effect of his report. The bullishness carried through until it became clear that the "spring selling (buying?) season" was never going to materialize.

I worked in the industry and I remember what people were thinking. They honestly thought that spring of 2007 would come and the real estate market would kick right back into high gear.

That didn't happen, and now there are key problems that make it even less likely that we have reached the bottom of the housing market.

• Lending is tight. Homebuilders do great when there is no-questions-asked lending.
  
• Prices are still too high. High relative to rents, high relative to median incomes, high relative to other goods' historical increases, high relative to building costs. They need to come down much further - and the Case-Shiller HPI futures markets are predicting it.
• Inventory is huge in absolute numbers and in number of months' sales, and keeps getting bigger by both measures.
  

Given these challenges, and the tarnished balance sheets of the builders (with high debt, loads of difficult to sell homes, staggering amounts of lots and land, and problematic off-balance sheet vehicles loaded with land and debt), it's unlikely that the builders' stocks have reached bottom.

Mr. Kim: We have not reached the end of the housing bust. We are only now reaching "the end of the beginning."