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Standard Pacific (homebuilder) Earnings Report; cabuilderboy response



February 05, 2008 – Comments (16) | RELATED TICKERS: SPF.DL , XHB

First off, disclaimers:

I am not floridabuilder, nor do I know him in real life, nor do I have his contacts.  I do not work in homebuilding, or anything related to real estate (I work in the health care sector), and in fact, I have never actually bought a property.  I have bought plenty of stock and mutual funds in my time, and I feel like I have a feel for companies and share prices.  So that being said, I'm going to do my best to fill in the void that fb has left.

Before I get into SPF's earnings report, I want to call cabuilderboy out on the carpet.  In a reply to blog earlier today, you said the following:

"Guys like Nouriel and Richard Thornberg (formerly UCLA Anderson School of Business) finally have their day in the sun. They were crying "wolf" for years before the downturn, and now they get to gloat. Sure prices are down, but go ask anyone in CA who owned a home prior to 2001 how thier equity has held up. Do the math, up 100% less 30%= 70% increase for doing nothing more than enjoying a home with your family.

People made millions while these guys were crying foul, and now they get to pretend like they are genuiouses.just for being contratian. "

cabuilderboy, based on historic metrics, they were correct, the bubble was in full effect in 2002-2003.  The thing that propped it up was keeping the fed funds rate too low for too long, and a complete lack of regulation from the Fed which has allowed an entire industry to thrive on fraud.  We have billions, maybe even trillions of loans that were based upon false loan docs, false appraisals, shady loan officers... etc.  And up until this post, I thought that maybe you were more neutral, like floridabuilder, and now, I'm sorry to say, you've shown your true colors.  You say "do the math."  Well, let's do the math, shall we?

Okay, now students in my Fool classroom, can you answer me this:

True or False: 

If an asset rises 100%, and then loses 30%, you still have a 70% gain.

I will post the answer, after I actually "do the math."

Let's use a very simple example, and let's use a stock, since that's what we do here.  Let's assume no tax ramifications, no dividend, no holding costs, and no transaction fees.

Let's say I buy one share of fictional company "Bubbliscious" for $100/share.  Now, within 2 years, the share price has gone up to $200/share.  A 100% gain, right?  Well, let's just be sure.

($200-$100)/$100 = 1.0 x 100% = 100%  Whee!

this works for any value, if we started with 50 and rose to 100..

($100-$50)/$50= 1.0 x 100%= 100%

Okay, so what happens if my asset price falls by 30%?

Let's use my original example.  At the height, my stock in Bubbliscious was 200/share.  It's now dropped 30%.  So where is the share price if it drops 30%?  30% = .3

$200 * .3 = $60

So, we've lost $60 from the top price of $200, which would be the following formula:

200-60 = 140.

So we now have a share price of 140.  What's our return on our original 100?

(140-100)/100 = .4 * 100% = 40%

So, the answer is FALSE.  If you gain 100% and lose 30%, you do not have a 70% gain, you have a 40% gain.  And I think now many understand why I have zero faith and confidence in the homebuidling and real estate industry - someone who claims to be a homebuilder cannot give you an accurate rate of return from a very simple equation.  And these are the people that are building our homes?  No wonder why so many tract homes have studs 24 inches apart instead of the standard 18 inches.


Now, as to SPF.  Real simple.  Shares outsanding: 72.78.  Cash at end of 4Q: $219m 

This means that there is $3/share in cash on the balance sheet.  So there is your floor for the next quarter folks, $3/share.  After reading into their earnings report, I now give some credence to the exec that floridabuilder referenced when he said they would not be filing for BK.  With this amount of cash, it is likely they will be able to successfully service their debt throughout 2008, even with further land impairments (which are likely).  Ongoing, SPF has a huge problem, as it's biggest operations are in the bubbliest areas (CA, AZ, FL).  Plus the fact that the demand for their product will continue to dry up.  Also, SPF did report a profit from homebuilding operations a $.07/share.

I think the sales number for Q1 2008 are going to knock them down from where they are now, but for now a trading range of $3-7/share looks reasonable.  They do have a lot of long term debt so in the longer picture, if you are holding for 5+ years, I would be very careful and take any 10-20% gains you get, because they are not out of the woods in terms of BK, but I would say their position is stronger now than it was before.  For 2008 however it does appear, short of any surprises that were not mentioned on the earnings report, that SPF will continue to operate through 2008.

And if it seems like I'm turning bullish, well... I can't say that I am.  I do recognize, however, that SPF is probably trading around it's fair value based on closing price 2/4/08, it will be interesting to see how the market reacts.  I am willing to readily admit that my underperform call at 2.50 was a bad call, it was based on me thinking that SPF was definitely going BK within 6 months, and I see no chance of that happening at this time.  Time will tell whether they will be able to survive through 2009 and 2010 though.

I'm sure florida will throw his 2 cents in here at some point, but again I want to give the disclaimer that I'm not him, nor do I have his expertise.  In parting though, I'm thinking that SPF's earnings report will not sway the homebuilder sector much tomorrow, more likely bigger macro data or financial news/bailout/tax plan "stimulus" will outshine whatever effect it has in the opening hours.

Breaking note: it appears that Bank of America securities has raised it's target on SPF to 5.50 from 2.50.  My guess? SPF has a gap up over 5/share on the opening bell tomorrow.  Not sure where it goes from there.  Incidentally, BofA securities analysts are beyond comprehension in the "conflict of interest" territory when it comes to valuing homebuilders, but I will say that this is likely a fair price target.

Final disclaimer: this is for entertainment purposes only, trading and investing involves risk and demondoug accepts no responsibility for actions taken on this analysis.   As of the time of writing this blog demondoug had no position long or short in any equities mentioned above.

16 Comments – Post Your Own

#1) On February 05, 2008 at 8:25 AM, MakeItSeven (31.22) wrote:

Compiler person here and not only I know nothing about homebuilding business, I have never taken a course in accounting or finance in my life, so take my 2c for what it's worth.

Some observation:

- The biggest source of cash inflow comes from the  $235M in NOL carryback.   They can only get this because of the 846M loss for the year.   This is not recurrent source of income and only happens in the fourth quarter.

-  Even homebuilding operations (not counting land impairment charges) caused a loss if counting SG&A.

Gross margin from home sales = 20,481,000 

SG&A                                    = 109,211,000 

So there is a roughly 89M loss from the homebuilding operation alone. 

- Debt to book capitalization has now increased to 66.2%.   It was 55% last year and 56% in the latest Zack's report on PDF.

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#2) On February 05, 2008 at 10:30 AM, floridabuilder2 (98.66) wrote:

demon...... i did an analysis on SPF last night... i did red thumb it prior to earnings based on the short covering, but as you stated and as i have stated in the past... cash is the floor....  near term I see a pop, however, 2008 will be more challenging than people think..... 2 big analysts have actually downgraded or come out with negative outlooks on homebuilders - ivy zelman and michael rehaut (spelling?)... yet the BAC analyst gets the print on yahoo news wire.... hmmmmmmm

BAC is basing their analysis on no recession and that affordability is happening right now...... in other words they have removed the risk premium from homebuilding stocks......  what does that mean?  Oil is said to be trading at 100 a barrel late 2007 because of risk premium, but if you took out the risk of shutdowns, war escalation, iran, peak oil fear, etc... that it should be trading in the high 60s.............

Well homebuilders are trading at fair market if there was no risk!!!!!!!!!!!!!!!! no risk!!!!!!!!!!!!!!!!!!!!!!!!  I can't subscribe to that view today, because there is risk........... now if your a day trader you don't care because you can dump your securities in 10 seconds... but if you are look at building a position and you don't want to have downside risk in your stock price or minimize it.......... well current prices of builder stocks are too high

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#3) On February 05, 2008 at 12:58 PM, mickeyc21 (29.73) wrote:

Its math like that that terrifies me!

This model assumes you market timed perfectly and bought in at the low and then DID NOT refinance. There are very few that did not buy into the "I just made a million bucks!" mentality on their houses rise in "equity". It also assumes no sales and re purchase  of homes. The friction in moving homes is estimated at 10% ( can't source that unfortunately but realtor 6%, plus closing costs, movers, disconnection and reconnection fees etc) and the US has a very mobile population.

The number of people I know who moved out of their $500k starter home (yep I live in California!) with a $300 - $500k profit and straight into a 2-3 million dollar McMansion is huge. How did they afford the mortgage increase from $500k to 1.5-2.5 million? If you don't know the answer to that you probably  have your entire liquid net worth in the market now because everything's such a bargain.

The other stunning flaw with that math is inflation. Real inflation is running around 7-10%:

 Even assuming the hilarious CPI being published by the government (government gets spelled with a small "g" by me these days) is true the idea that you have made money after the correction doesn't hold up to scrutiny.

What we have seen is the biggest pump and dump of all time. To those who think this is going to be a smooth downturn:

I have a huge sack waiting to take all your money. 


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#4) On February 05, 2008 at 3:50 PM, DemonDoug (30.70) wrote:

Trading range for SPF 2/5/08: 4.82-5.55

Every once in a while I make a right call that sickens me, this is one of them.  For once i think florida and some of you others might be more bearish than even me.  Even if the bulk of their money came from NOL, they have enough to service their debt.  The homebuilding business in general is still going to go down, I feel that the Q1 and Q2 numbers from this year are going to be down compared to 2007.  But like I said after the report, there is more upside from 3/share than downside.  In terms of shorting, caveat emptor, as you can see from my bad call on my caps page regarding spf.

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#5) On February 05, 2008 at 11:25 PM, ahobbs (< 20) wrote:

FYI, standard studs are spaced at 16" on center, not 18".  That way you can get the edges of a standard 8' piece of plywood to land on a stud.

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#6) On February 06, 2008 at 1:37 AM, DemonDoug (30.70) wrote:

ahobbs -

I'll take your word for it (since I don't build houses for a living).  I just remember a friend of mine who bought a tract home in the west San Fernando Valley area and his studs were 24" across.  I remember asking him... isn't that a big far?  I thought studs were supposed to be closer? And he told me the plans for the house were for 18".  And that his house had a lot of problems, and the studs were near the least of his problems.

Anyone who would like to share a story of this nature would be appreciated. 

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#7) On February 06, 2008 at 11:37 AM, bellard (97.55) wrote:


Just a quick correction. SPF cash flow in q4, which was very good, did not include the 200M tax refund. This will happen this month, so as of Feb, SPF has over $6 dollars a share in cash. I think SPF will use some of that cash to continue to buy back debt at .50 cents on the dollar. I estimate 200M use of cash - 400M debt reduced. If SPF stock price could drift up to 7ish, then SPF could float the 100M of shares that are approved for sale. This would dilute SH's but rasie 700M in cash, buy back more debt in the open market at discounts...

I still own some calls on SPF. My 6 month range on SPF is 3-9. The bear case is still solid - The HB's are in a depression. But the macro-economic, political trends are very positive. Home prices are now close to base affordability.

The way to compute this is simple - Compare the monthly mortage payment at current home prices and rates VS 25% of monthly gross income...Wages have been rising, rates and home prices have been falling...very simple. On the political side - GSE's limits being rasied to 700k, and the tax carrybacks going back 5 years(both in seneate bill) will also help SPF in 2008..


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#8) On February 06, 2008 at 1:57 PM, TDRH (96.58) wrote:


   Don't beat yourself up with the call on SPF, I have a page of calls  that bounced into painful territory, in particular WCI which I picked for your contest.   I think there is another level yet to come and I am going to try and wait for it.   BAC's valuation smells like  an attempt by somebody to make money short covering and or protect a vested interest. 

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#9) On February 06, 2008 at 10:58 PM, ahobbs (< 20) wrote:

Sorry to hear about your friend's house.  Sounds like the builder used "cheap" labor.  I hope they're not still in business.

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#10) On February 07, 2008 at 1:01 AM, cabuilderboy (81.52) wrote:

Sorry for the delay, but I am out of town and have not had much time to play. First, you should read my response to Quality today, before you try and guage my sentiment.

Also, thanks for clarifying your background, because I am still trying to figure out how you can apply my math related to homeownership to  your example of owning a stock. I didn't either bother doing a cash on cash return for you, which would blow your calculations out of the water.

I called Thornberg on the carpet about 4 years ago, and CNBC did a segment showing you would of lost 60% by listening to him and the Anderson School in the early 2000's, so I will stick by my opinion, because it is right.

You can support these other bears all you want, but it does not change the fact that if you would have listened to them from the beginning you could of missed some opportunities.

Regarding SPF, it looks they will get a reprieve for a bit. All hail the tax accountants for the forseeable future. Looks like NOL carrybacks will help the big publics get some badly needed liquidity for a while. At some point sales and increasing backlog will matter. Lack of both in Q1 will take its toll on most builders.

Lastly, thanks for calling me out. By the way, you forgot to post my last line of the blog, where I predict the upturn of the housing market, and at some point I will also be right, just like Nouriel and Thornberg.

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#11) On February 07, 2008 at 3:19 AM, DemonDoug (30.70) wrote:


I might have some respect for you if you actually said "You know what, I was just quick replying to that post, and you were right - my math was wrong, but 40% is still a good return."

Fortunately for me, I did not start my working career until 2002, and when I saved money, I bought stocks in 2003, and made a boatload on it when I sold out many of my positions last year.  Missed some opportunities?  How about, chose not to engage in a ponzi scheme with money from Easy Al and the Fed backed by fraud?

As far as "missing opportunities," unless you timed it exactly right, and made sure you sold at or near the top, you are now screwed.  You are now holding an illiquid investment with huge holding costs.  And many people are now walking away.  Four years ago... had you bought a home then, you would be even in terms of price appreciation.  Take into account realtor and loan officer fees, closing costs, maintenence, taxes, and insurance, you would be lucky to break even.  Were you telling everyone to buy buy buy in 2004?  Anyone who took your advice then would have missed out on better opportunities in commodities and stocks.

If you are representative of the majority of private builders out there, I can only imagine how much in deep poo your entire industry is. You are also completely out-of-touch.  From your last blog:

"While I fear more discounts may be in the offing for 2008, I believe the majority of price decreases have already occurred for our entry-level new home market. Not that sales are going to “take-off” anytime soon, just that we are getting to fairly attractive sales prices, by California standards. Based on our December traffic counts, I know people are out kicking the tires and waiting for the “all clear” signal to buy."

What you completely fail to comprehend, is that it was NOT consumers and home buyers that have lead the RE industry down.  It is the loan markets, banks, mortgage companies, investment banks, and foreign wealth funds that have stopped the credit spigot.  There were still way too many homes being sold at way too high prices in early 2007, when it was obvious to everyone short of RE cheerleaders and denyers knew that the bust was on.  The sheeple were continuing to plow "dumb money" fueled by the credit markets.  You state "I believe the majority of price decreases have already occurred for our entry-level new home market."  What happens when banks are foreclosing on entire condo towers and whole subdivisions?  Your statements are exactly the statements that people in 2006 were saying in Sacramento - it's different here, it's California, RE holds value, a housing crash can't happen here.  There are NO fundamentals pointing to a housing turnaround for new homes, or for old homes for that matter.  Median price to median income is still way too high, especially for outlying suburbs where people have to drive 60-90 miles each way if, say, you are living in Rancho Cucomonga and working in downtown LA.

Here are the facts:

Your numbers were wrong and you won't admit it.

Four years ago you were claiming RE was a good investment.  Home prices in many places are back to where they were 4 years ago, and in fact lower in many places.

Here is the analysis:

I do not trust any calculations or numbers from someone who cannot understand a simple return on investment

I do not trust anyone that thought that in 2004 a home was a good investment. 

You are a cheerleader who, in the face of a tidal wave of facts, have conceded a few points to the reality of the situation. You put your faith in credit markets that are dead, government programs which are likely to have little impact, and completely ignore fundamentals of homeownership which are returning.

You are a cliche of someone whose job depends on not understanding the factors that govern your market.  You are the IT guy who loaded up on company stock and thought the tech boom would go on forever... or would correct in short order.

You have no comprehension of the absolute scope of what the credit markets are doing, how they caused the bubble in the first place, and why it's the credit markets, not "buyer psychology," that are causing the greatest pain and loss of demand for purchasing homes.

You also have no picks on CAPS, which makes me believe you are here more to shill for yourself and your industry than actually contribute to the stock-picking community.

You are welcome to post and argue any time, because, frankly, your words give us all insight into how incredibly incompetent a home builder can be. 

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#12) On February 07, 2008 at 4:35 AM, joeykid13 wrote:

DD, This ain't funny, and it's late???  Dammit, what R U tryin' 2 say?, I'm right here in Rio de Jeniero at Carnivale!  Rut...Ro.., Shaggy?

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#13) On February 07, 2008 at 10:49 AM, dwot (29.45) wrote:

Well...  By all accounts I have done very well from a combination of responsible behaviour towards debt and a housing bubble.  Just 4.5 years ago my finances looked like a disaster relative to the enormous percentage of household income housing has taken from our lifestyle since the day we became homeowners.

At the end of the day had the asset bubble never been launched I might have had the opportunity to enter the housing market at an affordable price in the first place and I think I would owned outright the home I just sold.

When I compare what I had to what my parents generation had, well, they had houses, not townhomes, children and they afforded that with single professional incomes.  I'd have to say I saw more of the second parent supplementing the income in the high school dropout and no post secondary training group.  I saw professional parents buying their teenagers new cars in high school.

Not only did I not have children, we shared a vehicle for 12 years to cut costs.  And until I freed up the equity by selling my home I still didn't feel like I could afford a new vehicle.  Yes I could afford to qualify for a car loan, but that would have kept me in debt for an extra 2-3 years and I was looking at not being able to get out of debt until age 60 as it was.  My husband and I have two degrees each and this is insane by comparison.

People keep saying "I don't know how young people do it today," and the truth is they can't. 

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#14) On February 07, 2008 at 11:46 AM, cabuilderboy (81.52) wrote:

Congrats on your math. Does that make you happy. I am not going to give you a lesson on cash on cash returns because I don't want to drag this out. Suffice to say, builders are in a world of hurt, and I don't remember saying any different. If you want to worship at the alter of Nouriel, and he says peak to trough prices will go down 30% (via CNBC interviews) and I tell you new homes have hit that number, I don't understand how I am a shill? Regarding CAP picks, I am a fairly boring investor, so picking mutual funds may not get anyone excited. By the way, I run a company in the business I am talking about and don't have time to stay on this site all day. I concede, the bears have their day today, but I know, that will not always be the case. Again, read my prognostication for 2008 in a response to Quality, before you start your future rants!!!! My money is in the business I am talking about for the long run. Can you say the same??

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#15) On February 07, 2008 at 10:52 PM, abitare (29.62) wrote:


I am of course algined with dwot, DD and Nouriel.

But since you are still putting up resistence I am bringing in the Chuck Liddel of real estate:

Case Shiller founder of the Case Shiller real estate index:


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#16) On February 23, 2008 at 3:12 PM, jesusfreakinco (28.28) wrote:


 Why are you buying into the "Cash" lie?  I can tell you how cash balances can rise - just stop paying your vendors?  Cash is important, but can be manipulated.  The bigger questions are creditworthiness and strength of the balance sheet as a whole.  For that, you have to look at Alsry's posts - he's the banker in the crowd.

I have been a CFO and negotiated lines of credit and understand covenants and the waiver process.  Eventually, the bankers assess the risk of repayment too high and they pull the line.  

I think we can't be that far from the bankers getting nervous.  There are just too many macro-factors working against.  Monolines, credit crunch, write-downs, credit card issues, ARM resets, etc...  Need I say more?

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