Many Are Betting Slump in Housing Has Hit Bottom
Home builders’ stocks have been on a tear lately, a clear bet by some investors that home sales are troughing and that a recovery is assured in 1991.
But more than a few money managers are dubious about that outlook. That’s especially true in jittery California, where layoffs are rising and the economy still appears to be in the early stages of recession rather than the later stages.
So far, you can’t argue with success: Investors smart enough last fall to buy stock in Los Angeles-based Kaufman & Broad Home Corp., California’s largest home builder, got a bargain basement price of about $5.50 a share. On Tuesday, KBH closed at $11.375, up 111.6% from the low.
Stephen Dobi, housing analyst at Smith Barney, Harris Upham & Co. in New York, says the stocks’ surge is right on schedule. Historically, builders’ stocks have hit bottom six to 12 months before the cyclical low point in the companies’ earnings, he says. So if the stocks reached their lows last fall, a recovery in housing should occur sometime in the next nine months, Dobi says.
He would go right on buying KBH now, with a price target of $14 in six to 12 months and $24 within two years, he says.
“I applaud their guts,” says David Turnbough, senior portfolio manager at Associated Capital in San Francisco, referring to Dobi’s followers. But Turnbough isn’t willing to follow them now.
To their credit, the biggest builders, such as KBH, still are selling homes--though at a much-reduced pace. Also, the major builders have taken most of the steps that investors wanted to see: They’ve cut their unsold-homes inventory, shored up their balance sheets and hit the market with lower-priced homes to try to pull first-time buyers back in.
KBH, for example, says its inventory of unsold homes now is down to 120 units from a peak of about 400 last year. And the firm has been aggressively snatching market share from smaller builders, hoping somehow to match in 1991 the 3,026 homes it sold in California last year.
Charles Biderman, who writes the weekly Market Trim Tabs investment newsletter from Santa Rosa, Calif., says KBH accounted for 34% of the 79 new homes sold in the Central Valley region of the state in the week ended Jan. 20. Yet KBH controls just 7% of the housing projects in that region. So KBH clearly is doing something spectacular to move so many homes at the expense of its rivals.
Indeed, KBH has become the price leader in many areas. In Stockton, the firm has opened a project with homes priced just under $100,000. And Biderman predicts that KBH will blitz the Antelope Valley this spring with homes priced under $80,000. Chad Dreier, KBH’s chief financial officer, will say only that the under-$80,000 price rumor “could be” true.
Those are nice prices, all right. But even if KBH can sell those homes, can it make money doing so?
“We think so,” Dreier says. He says he’s comfortable with Wall Street analysts’ consensus that KBH will earn about $1 a share this year, down from $1.25 a share last year.
Investors who have bid up the stock price apparently don’t care about a dip in earnings. They were much more worried about losses and now feel that KBH and other major builders are in no danger of falling into red ink--and that, as Dobi says, it’s time to buy in anticipation of the recovery.
Dreier says the red-ink forecasters have had the wrong idea about where KBH’s low-price strategy would lead. In areas such as the Antelope Valley, he says, KBH has an “outstanding” land base purchased years ago at relatively low prices. “It’s a fallacious assumption that we’re losing money if we cut prices” there, Dreier says.
But some analysts, such as Lawrence Horan at Prudential-Bache Securities in New York, warn that KBH’s price leadership should be viewed more as reaction than action. “It’s an attempt to compete aggressively with other builders that are having fire sales,” he argues.
Horan has no doubt that KBH is a long-term survivor in California. And the firm has a buffer, of sorts, in its French home building subsidiary, which has contributed about 40% of annual revenue.
But as KBH’s smaller California competitors are pushed out of business--and are forced to sell inventory at cut-rate prices--Horan sees little chance for KBH to earn $1 a share this year. His estimate is 80 cents. And overall, he says, “there’s too much of a chance of red ink” for all or most home builders this year to justify buying the stocks at current prices.
The key here, of course, is what happens this spring, the traditional home-buying season. Horan and others believe that, particularly in California, housing demand is going to remain weak even if mortgage rates fall further. The surge in corporate layoffs--especially among white-collar workers--is hitting California especially hard now. The state’s unemployment rate, 7.1%, already is above the national rate of 6.1% and is rising fast.
If the bears are right, worries over the economy and the war will keep buyers sidelined well into the spring--and investors won’t have the patience to stick with KBH or stocks of other builders that already have rebounded almost to their 1990 highs.
Will Mattel Overpay for Tonka?When toy maker Tonka Corp. acknowledged Monday that its financial troubles had necessitated putting itself on the block, El Segundo-based Mattel Inc. became the natural suitor for all or part of Tonka.
And that raised an important question: Would Mattel strike a deal that could hurt its balance sheet and/or earnings outlook--after spending so much time in the 1980s rebuilding its finances and its reputation on Wall Street?
Mattel won’t comment on what it might or might not do regarding debt-laden Tonka. But one long-time Mattel watcher on Wall Street believes that Mattel investors have nothing to worry about. “Look at the Mattel board of directors,” this expert said, requesting anonymity. The Mattel board is heavy with money managers and investment bankers, such as Lionel I. Pincus and Richard J. Riordan, who helped guide the firm out of its 1986-87 financial crisis.
Many of those directors, or their firms, have substantial stakes in Mattel. They have tripled their money in the stock since the mid-1980s. “They are not going to let (Chairman John) Amerman play ‘bet the company,’ ” the expert said.
So as much as Mattel might want Tonka’s prized Parker Bros. division, it’s unlikely that Mattel will make an offer that would substantially dilute earnings. “I, for one, would not want to see a whole lot of dilution,” says money manager Bob Rescoe at New York-based Fred Alger Management, a Mattel shareholder who echoes others’ sentiments.
Buying Tonka’s shares isn’t the real issue: The market value of Tonka’s stock, at $4.50 a share Tuesday, is only about $70 million. Mattel could take care of that with its $160-million cash hoard.
The challenge for a buyer would be the assumption of Tonka’s $400-million debt load. Mattel may just wait as long as it can to squeeze Tonka’s bondholders into a deal they don’t want but will have little choice but to accept.
HOME BUILDERS REBOUND How key home builders’ stocks have jumped from their autumn lows:
52-week Tues. Chng. from Stock high-low close 1990 low J.M. Peters 9 1/2- 3/4 2 +166.7% Kaufman & Broad 13 7/8-5 3/8 11 3/8 +111.6% PHM Corp. 12 1/8-6 11 7/8 +97.9% Lennar Corp. 20-9 1/2 18 +89.5% Ryland 22-9 1/2 17 3/8 +82.9% Centex 44 1/4-19 1/4 31 5/8 +64.3% Standard Pacific 15 7/8-4 3/4 7 1/2 +57.9% Del Webb 11 5/8-4 1/2 6 +33.3% S&P; 500 369-295 335.83 +13.7%
All stocks traded NYSE except Peters (American Stock Exchange)
