Standard Pacific (homebuilder) Earnings Report; cabuilderboy response
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.