So the huddle paid off and all that work to move some inventory must be somewhat encouraging to the HBs...already back up to '92 levels...whoops there goes that encouragement.
I wonder how "builder confidence" compares over a 20yr span as shown in the graph. Think of the information you have at your finger tips now that you could only guess at decades ago. Does this mean its harder to be confident today? Think of the size of the builders and the resources they have that smaller builders don't have in the case of a "soft spot". What of the self-fulfilling aspect now with such a heavy marketing influence compared with a couple of decades ago.
Ok, I've decided that there should be some sort of confidence deflator or chain-weighted something or other to take care of the dilution (concentration) of real confidence depicted here.
So, now which way to tilt the graph? Right hand side down a couple of degrees, I think...
I don't know, Calmo. You'd think the information superhighway would make it more likely the builders are bummed out--on the assumption that ignorance is bliss, and we had more of that in the old days--but then I remember Bob Toll being so shocked! shocked, I tell you! that gambling was going on in the casino, and I conclude that any hypothesis involving HB CEOs and information is going to run into some problems.
Lennar Posts Loss on Land Writedowns; Revenue Drops (Bloomberg, Jan. 17th): "Lennar Corp., the fourth-largest U.S. homebuilder, reported its first quarterly loss in a decade... Net loss for Q4 was $195.6 million, or $1.24 a share, compared with a profit of $581.2 million, or $3.54 a share, in Q4'05 Three U.S. builders reported over $1.3 billion in land writedowns this week. Lennar CEO: "Despite uncertainty we believe we will meet or exceed 2006 earnings of $3.69 per share." BB&T Capital: "The fact that they have the confidence that they're going to meet or exceed $3.69 a share, is ballsy to say the least.'' Shares rose as much as 5% in afternoon trading."
Because I'm a glutton for punishment, I had to go read the entire Lennar statment:
"Stuart Miller, President and Chief Executive Officer of Lennar Corporation, said, As we noted in our pre-earnings release, market conditions have remained depressed through the end of our fourth quarter. In this environment, we have continued to focus on strengthening our balance sheet. We have continued to build-out our inventory, deliver our backlog and convert inventory into cash. With a balance sheet-first focus, we have priced our homes to market conditions and maintained an inventory neutral position. Accordingly, our land inventory and homes under construction have declined throughout the second half of 2006.
Mr. Miller continued, As we look ahead to 2007, the strength of our balance sheet, together with our renegotiated land positions that reflect current market conditions, provide the springboard from which we will rebuild our margins. To that end, we have identified four focal points that will drive our margin improvement in 2007: right-sizing S,G&A expenses to match both current volume and efficiencies, reducing construction costs, redesigning product to meet todays market demand and building on land at current market prices. We will also continue to carefully match our starts to demand, and as a result, we estimate deliveries will decline in excess of 20% in 2007, compared to 2006.
Mr. Miller concluded, Uncertain market conditions make it difficult to provide a 2007 earnings goal. While we know that the margin in our backlog will result in lower profitability in the first half of 2007, we believe that if the current environment of strong employment, low interest rates and a healthy economy continues, and the market for new homes demonstrates traditional, seasonal improvement, we will meet or exceed our 2006 earnings of $3.69 per share.
What does a Homebuilder company do to "rebuild margins" and "match both current volume and efficiencies, reducing construction costs, redesigning product to meet todays market demand" when "customer" demand falls 40% - 70%? Start building coffins and digging burial plots?
R-N-L... I got a masters in mfg systems... the guy who started the program was at first a very successful businessman who had performed a number of turn arounds in rust belt mfg... he later went on to get a PhD & did research on the history of turn arounds... I was fortunate to have taken his class on this subject. VERY good... not just academic BS. We discussed this topic in detail.
On margin repair & profitability... if the HBs cost structure is mostly fixed & sunken (unavoidable) then there is nothing they can do... they are dead if the conditions move away from their positioning.
If the cost structure is highly variable AND avoidable (meaning they aren't locked in & have flexibility to change course & cost) then they have a good shot at returning to & maintaining profitability even on the way down.
Now even if they are heavy on fixed & light on variable... they might still be okay IF they can transition from fixed to variable quickly & without losing their ass. This is in effect how US mfg rebounded in the late 80s to mid-90s. It appears that is what the HBs are trying to do.
You see the strategy in the release... renegotiate land deals, reduce inventory & lay off 'administrative O/H' in an effort to reduce fixed expense exposure... meanwhile change their mix of offerings (probably cheaper) and more closely build to demand (think bigger deposits & tighter contracts even if fewer & cheaper units are built) in an effort to increase their 'variable cost' position.
Understand a lot of the actual work has always been done by contractors - a variable cost - so the HBs are focusing on those things that haven't been variable... land & overhead.
Anyway if the market falls 70% the HBs have problems regardless of what they do... If a 40% decline, the HBs have a chance. Just my guess without seeing the specifics.
The Lennar PR is the kinda strategy response you'd expect from a B school case study. But in the real world they have to execute - and that is the hard part. It will be interesting.
The problem with Lennar is that they already make crappy houses. They've cut so many corners, there's nothing left but a smooth round circle around which they may run with their fixed and variable costs.
Their only saving grace is they have relatively low debt.
umber2son... I am aware of some of the issues plaguing Lennar especially in Florida... though not all.
Ironically they might make better homes (meaning fewer defects) if they made cheaper homes (less expensive designs, even more standardized than current offering)... the screw ups could very well have been from over-reaching & getting outside what they can execute.
'Back to basics' is usually an important part of 'margin' & 'profitability' repair.
Not saying they will execute - I doubt they will - just saying it isn't inconsistent.
You B right Tanta: how could I forget Bob Toll's exemplary performance of builder confidence? I surrender the builder's confidence index as anything but a cheerleader's report, although those recent sales reports have my interest. What order of magnitude stupidity does one need to buy now? What kind of incentives are required to sell a house now without dropping the price? (I refuse to believe this picture) Where is the blossoming sector we have all been waiting for that pays salaries that can get you into one of these half million dollar starters?
I am surprised at how angry posters are with Mish.
Is this spillover anger at w for escalating the war? Mish is a guy who actually worries that the Fed might lose the people's confidence and is at pains to be careful.
w on the other hand is busy sneaking around, while everyone is digesting "the surge", getting out the SSTF cabinet again to tell us it's still full of IOUs. This guy couldn't give a hoot about those "people who have spoken."
Mr. Miller meant: "I am confident we can write down enough of this crap to have a chance for bonuses in 2007; otherwise, impress the hell out of them for a day and blow up our stock options"
You know Lennar may build cheap homes, but any time you build 50,000 of something, the bean counters are going to start running the show. When a corp bean counter (former life) can save $1,000 x 50,000 they start getting stupid and Suzy Homemaker gets unhappy. When that happens the birth rate declines and houseing demand goes down.... very simple.
See, all that advanced education and we got nowhere.
I don't know, sippn, I always thought "right-sizing SG&A" meant "and we'll start by firing all those stupid accountants who can't seem to get on board with the 'balance sheet-first focus' and keep harping about the Income Statement." Where else are they going to find the useless mouths to feed, in the variable-cost sales office?
dryfly, I agree with you. In fact, I have shorted a number of home builder stocks, but not Lennar. They are in a relatively stronger position than most.
I just wouldn't buy one of their homes, even if they do discover a newfound interest in quality.
--
Here is the real description of the index:
Index Level\tBusiness Conditions
80\t\tOut of this world
70\t\tGreat
60\t\tGood
50\t\tNot bad, not good, OK
40\t\tBad
30\t\tVery Bad
20\t\tHorrible, beyond belief
FSU Editorial: "Has Housing Bottomed in the US?" by Jas Jain,
PhD 12/22/2006
So, conditions remain between Bad and Very Bad. What an improvement!
Jas
So the huddle paid off and all that work to move some inventory must be somewhat encouraging to the HBs...already back up to '92 levels...whoops there goes that encouragement.
I wonder how "builder confidence" compares over a 20yr span as shown in the graph. Think of the information you have at your finger tips now that you could only guess at decades ago. Does this mean its harder to be confident today? Think of the size of the builders and the resources they have that smaller builders don't have in the case of a "soft spot". What of the self-fulfilling aspect now with such a heavy marketing influence compared with a couple of decades ago.
Ok, I've decided that there should be some sort of confidence deflator or chain-weighted something or other to take care of the dilution (concentration) of real confidence depicted here.
So, now which way to tilt the graph? Right hand side down a couple of degrees, I think...
We had good employment and some people got year-end bonuses.
I think bad surprises will come in March, when all those sellers sitting on the fence will come back to the market and drop prices.
I'm watching few local markets and I observe that many sellers delisted their houses. I suppose they either decided to rent out or come back in March.
NAHB = NAR = no credibility
"I think bad surprises will come in March, when all those sellers sitting on the fence will come back to the market and drop prices."
I agree. I call the coming spring as the season of truth for the US E-Con-omy. It will collapse like all Ponzi schemes.
How much more debt can be pushed on the households in distress and via what vehicle? That is the real question for the bubbleheads to ponder.
Jas Jai
I don't know, Calmo. You'd think the information superhighway would make it more likely the builders are bummed out--on the assumption that ignorance is bliss, and we had more of that in the old days--but then I remember Bob Toll being so shocked! shocked, I tell you! that gambling was going on in the casino, and I conclude that any hypothesis involving HB CEOs and information is going to run into some problems.
From Bloomberg:
Lennar Posts Loss on Land Writedowns; Revenue Drops (Bloomberg, Jan. 17th): "Lennar Corp., the fourth-largest U.S. homebuilder, reported its first quarterly loss in a decade... Net loss for Q4 was $195.6 million, or $1.24 a share, compared with a profit of $581.2 million, or $3.54 a share, in Q4'05 Three U.S. builders reported over $1.3 billion in land writedowns this week. Lennar CEO: "Despite uncertainty we believe we will meet or exceed 2006 earnings of $3.69 per share." BB&T Capital: "The fact that they have the confidence that they're going to meet or exceed $3.69 a share, is ballsy to say the least.'' Shares rose as much as 5% in afternoon trading."
Ah, I understood!
The NAHB index is seasonally-adjusted. We had a record-warm December. No wander the index is getting better after adjustment.
Because I'm a glutton for punishment, I had to go read the entire Lennar statment:
"Stuart Miller, President and Chief Executive Officer of Lennar Corporation, said, As we noted in our pre-earnings release, market conditions have remained depressed through the end of our fourth quarter. In this environment, we have continued to focus on strengthening our balance sheet. We have continued to build-out our inventory, deliver our backlog and convert inventory into cash. With a balance sheet-first focus, we have priced our homes to market conditions and maintained an inventory neutral position. Accordingly, our land inventory and homes under construction have declined throughout the second half of 2006.
Mr. Miller continued, As we look ahead to 2007, the strength of our balance sheet, together with our renegotiated land positions that reflect current market conditions, provide the springboard from which we will rebuild our margins. To that end, we have identified four focal points that will drive our margin improvement in 2007: right-sizing S,G&A expenses to match both current volume and efficiencies, reducing construction costs, redesigning product to meet todays market demand and building on land at current market prices. We will also continue to carefully match our starts to demand, and as a result, we estimate deliveries will decline in excess of 20% in 2007, compared to 2006.
Mr. Miller concluded, Uncertain market conditions make it difficult to provide a 2007 earnings goal. While we know that the margin in our backlog will result in lower profitability in the first half of 2007, we believe that if the current environment of strong employment, low interest rates and a healthy economy continues, and the market for new homes demonstrates traditional, seasonal improvement, we will meet or exceed our 2006 earnings of $3.69 per share.
I guess "ballsy" works.
Lennar's statement
What does a Homebuilder company do to "rebuild margins" and "match both current volume and efficiencies, reducing construction costs, redesigning product to meet todays market demand" when "customer" demand falls 40% - 70%? Start building coffins and digging burial plots?
theroxylandr,
Yes, weather. And by the way, the text suggests that the buyers represented in the buyer traffic index all showed up saying "where's my discount?"
R-N-L... I got a masters in mfg systems... the guy who started the program was at first a very successful businessman who had performed a number of turn arounds in rust belt mfg... he later went on to get a PhD & did research on the history of turn arounds... I was fortunate to have taken his class on this subject. VERY good... not just academic BS. We discussed this topic in detail.
On margin repair & profitability... if the HBs cost structure is mostly fixed & sunken (unavoidable) then there is nothing they can do... they are dead if the conditions move away from their positioning.
If the cost structure is highly variable AND avoidable (meaning they aren't locked in & have flexibility to change course & cost) then they have a good shot at returning to & maintaining profitability even on the way down.
Now even if they are heavy on fixed & light on variable... they might still be okay IF they can transition from fixed to variable quickly & without losing their ass. This is in effect how US mfg rebounded in the late 80s to mid-90s. It appears that is what the HBs are trying to do.
You see the strategy in the release... renegotiate land deals, reduce inventory & lay off 'administrative O/H' in an effort to reduce fixed expense exposure... meanwhile change their mix of offerings (probably cheaper) and more closely build to demand (think bigger deposits & tighter contracts even if fewer & cheaper units are built) in an effort to increase their 'variable cost' position.
Understand a lot of the actual work has always been done by contractors - a variable cost - so the HBs are focusing on those things that haven't been variable... land & overhead.
Anyway if the market falls 70% the HBs have problems regardless of what they do... If a 40% decline, the HBs have a chance. Just my guess without seeing the specifics.
The Lennar PR is the kinda strategy response you'd expect from a B school case study. But in the real world they have to execute - and that is the hard part. It will be interesting.
The problem with Lennar is that they already make crappy houses. They've cut so many corners, there's nothing left but a smooth round circle around which they may run with their fixed and variable costs.
Their only saving grace is they have relatively low debt.
umber2son... I am aware of some of the issues plaguing Lennar especially in Florida... though not all.
Ironically they might make better homes (meaning fewer defects) if they made cheaper homes (less expensive designs, even more standardized than current offering)... the screw ups could very well have been from over-reaching & getting outside what they can execute.
'Back to basics' is usually an important part of 'margin' & 'profitability' repair.
Not saying they will execute - I doubt they will - just saying it isn't inconsistent.
You B right Tanta: how could I forget Bob Toll's exemplary performance of builder confidence? I surrender the builder's confidence index as anything but a cheerleader's report, although those recent sales reports have my interest. What order of magnitude stupidity does one need to buy now? What kind of incentives are required to sell a house now without dropping the price? (I refuse to believe this picture) Where is the blossoming sector we have all been waiting for that pays salaries that can get you into one of these half million dollar starters?
I am surprised at how angry posters are with Mish.
Is this spillover anger at w for escalating the war? Mish is a guy who actually worries that the Fed might lose the people's confidence and is at pains to be careful.
w on the other hand is busy sneaking around, while everyone is digesting "the surge", getting out the SSTF cabinet again to tell us it's still full of IOUs. This guy couldn't give a hoot about those "people who have spoken."
Mr. Miller meant: "I am confident we can write down enough of this crap to have a chance for bonuses in 2007; otherwise, impress the hell out of them for a day and blow up our stock options"
You know Lennar may build cheap homes, but any time you build 50,000 of something, the bean counters are going to start running the show. When a corp bean counter (former life) can save $1,000 x 50,000 they start getting stupid and Suzy Homemaker gets unhappy. When that happens the birth rate declines and houseing demand goes down.... very simple.
See, all that advanced education and we got nowhere.
For what it's worth, the index did bounce. It is now 2 points above its 6-month moving average. The last time that happened was June 2005.
CR, have you any thoughts on this development?
I don't know, sippn, I always thought "right-sizing SG&A" meant "and we'll start by firing all those stupid accountants who can't seem to get on board with the 'balance sheet-first focus' and keep harping about the Income Statement." Where else are they going to find the useless mouths to feed, in the variable-cost sales office?
dryfly, I agree with you. In fact, I have shorted a number of home builder stocks, but not Lennar. They are in a relatively stronger position than most.
I just wouldn't buy one of their homes, even if they do discover a newfound interest in quality.