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Homebuilders Fall, David Tepper Trades More

August 09, 2011 | About:
Holly LaFon

Holly LaFon

249 followers
David Tepper, founder of Appaloosa Management, has made a killing specializing in junk bonds and distressed businesses. For instance, he made a historic $4 billion betting on the recovery of failing financials in 2009. That strategy seems reminiscent of his more recent plays in home building. Home building is one of the most miserable sectors of the economy currently, though many home builders have reasonable valuations for their cheap prices. Delving into this sector is the kind of gutsy move that Tepper tends to be able to make. Last quarter he bought Beazer Homes USA Inc. (BZH), KB Home (KBH), D.R. Horton Inc. (DHI) and Pulte Group (PHM).

In June, it appeared that perhaps Tepper had bought near the bottom of the market. National pending home sales rose 2.4% that month, compared to analysts’ expected 2% decline. The news gave many major homebuilders a bump. But recent earnings releases and recession fears have dispelled thoughts of a near term recovery. All of Tepper’s home building stocks have since declined, in some cases significantly. Fortunately, in the second quarter, he reduced his position in KB Home, D.R. Horton and Pulte Group, but loaded up on Beazer.

KB Home (KBH)

KB constructs and sells homes via several operating divisions in nine states and reaches 30 markets. At the height of the housing boom in 2005, KB Homes sold for over $80. Just this year, it has fallen 48% to $7 – one of the largest declines of its peers.

KB reported far weaker financial results in the six months ended May 31, 2011, than it did in the same period of 2010. It had a net loss of $183 million compared to a net loss of $85.4 million. Cash and cash equivalents shrunk from $908 billion at the beginning of the period to $627 million at the end.

The only area of the country where its revenue did not decline was the Southeast, where it lost $23 million, as opposed to $31 million last year.

KB Homes has the highest debt to equity ratio of the five that GuruFocus writer David Chulak researched in a recent article. At 1.10, it is teetering on the brink of not being able to pay its short-term obligations.

David Tepper bought 1,388,900 shares in the first quarter of 2011 at an average price of $14.06. Then, he sold 83,500 shares at an average price of $11.45 per share. Since then, the price has plummeted 55% to $6.34.

Beazer Homes (BZH)

Beazer homes has lost 95% of its stock price in the last five years. In the last five days alone, it dived 30%, very near to its 52-week low at $1.83 per share.

Allan Merrill, Beazer’s former CFO became the new president and CEO in June. He replaced Ian McCarthy, whom the board ousted three months after he reached a settlement with the SEC to return bonuses and stock proceeds after they investigated the company for alleged accounting fraud.

According to the 10-Q the company issued today, Beazer closed on 49.2% fewer homes in the quarter ended June 20, 2011, than it did in the same quarter of 2010. New home orders, however, increased 23.7% over last year.

Their revenue was down to $407.5 million from $722 million. A net loss of 277,618 was also reported, from a net gain of $777 million.

CEO Allan Merrill said in a statement: "Despite the litany of challenges confronting the economy and the housing market, the fundamentals continue to favor new home ownership with excellent affordability, low new home inventories, rising rental rates and unsustainably low levels of household formation."

Tepper added 1,285,161 shares of the struggling company at an average price of $3.95 in the second quarter, bringing his total stake to 2,652,840. A few weeks later, the stock is 61% cheaper.

D.R. Horton Inc. (DHI)

D.R. Horton is the second largest home builder by revenue in the United States and has operating divisions in 26 states and 72 metropolitan markets. In fiscal 2010, it closed on 20,875 homes. It also generates a portion of revenue from the sale of land and lots.

For the nine months ended June 30, 2011, D.R. Horton reported 4,874 net sales orders for homes, slightly fewer than 4,921 ordered in the same stretch of time last year. Home building revenues slid to $974.5 million from $1.4 billion. The home building cash on its balance sheet fell to $824.2 million from $1.3 billion last year.

Donald R. Horton, D.R. Horton’s chairman of the board, stated: "Market conditions in the homebuilding industry are still challenging, with high foreclosures, significant existing home inventory, high unemployment, tight mortgage lending standards and weak consumer confidence, which are all contributing to weak housing demand. However, housing affordability remains near record highs, interest rates are favorable and new home inventory is still very low. We continue to focus on providing new homes and communities for both first-time and move-up buyers, controlling our construction costs, SG&A and inventory levels and maintaining our strong balance sheet and liquidity."

D.R. Horton is down a comparatively modest amount – 19.61% so far this year. Tepper shed 66,500 of his 1,119,740 shares at an average price of $11.6 per share in the second quarter 2011. On Tuesday the stock sold for $9.56, 20% less.

Pulte Homes (PHM)

PulteGroup Inc. Operates in 60 markets and 28 states. Its brand portolio includes Pulte Homes, Centex Homes and Del Webb. It is another home builder whose stock dove recently. In the last five days, it lost 25%, and since the year started, it lost 37.9%.

In the second quarter, the company received about the same amount of new home orders – 4,222 – as it did the prior year. Its net loss totaled $55 million, compared with net income of $76 million the prior year. Second quarter results were affected by $41 million of land, mortgage, organizational restructuring and debt repurchase charges. Last year’s results were affected by $48 million for the same things, but were offset by a net benefit from income taxes of $82 million. Revenue from home sales slid 29% from the prior year to $900 million.

Pulte’s chairman, president and CEO, Richard J. Dugas Jr. made this statement: "The 2011 U.S. housing market continues to operate within the range of expectations we projected at the beginning of the year," said Richard J. Dugas, Jr., chairman, president and chief executive officer of PulteGroup. "It is a positive sign that buyer demand appears to have stabilized following expiration of the homebuyer tax credit last spring, but residential construction volumes are at historically low levels and market conditions remain highly competitive. In this operating environment, we are focused on reducing our construction and overhead costs and enhancing our product offerings."

Tepper had bought 1,637,112 shares in the first quarter 2011 at an average price of $7.6. In the second quarter, he sold 99,100 shares at roughly the same average price. He now owns 1,538,012 shares. The stock price has fallen 43% since then, to $4.60.


Rating: 2.9/5 (14 votes)

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