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alstry (36.27)

Wall Street Analysts Intentionally Misleading Investors?

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February 10, 2008 – Comments (16)

After its most recent earnings report, a number of Wall Street Equity Analysts upgraded SPF.  That fact that it was a number is what is potentially a little unsettling. 

 Standard Pacific (SPF) just came out with their earnings report and generated about $933 million in revenues after liquidating out of two markets and liquidating thousands of lots.  After receiving a tax rebate, Standard Pacific could have over $400 million cash in the bank assuming no expenditures or revenues between the end of the year and the date of the cash receipt.  But after paying its payables, employees, debt P&I payments, and JV obligations, much of the cash would evaporate quickly especially if it chose to pay off its revolver which it is currently violating.

 At the end of the quarter, SPF started a bunch of homes.  SPF concentrates its revenues in CA, FL, and AZ....some of the most challenged markets in the country.  Many of the homes SPF builds are in the higher price catagories.   The following is an excerpt from the Union Tribune:

Suzie Ek, vice president of sales and marketing for Standard Pacific Homes in San Diego County, said that her company has created smaller-than-average homes in Santee at the Stoney Creek at Riverwalk development. Seventy-one detached single-family houses range in size from approximately 1,818 to 2,607 square feet. The two-story homes range in price from the low $500,000s to $550,000.

http://www.signonsandiego.com/uniontrib/20080210/news_1h10smal-jmp.html

 It appears that SPF is downsizing to homes STARTING at $500K.  How many people can afford a $500K house with current lending standards.  After paying 20% down, you need an income of over $150K.  SPF has over 1000 spec homes under construction in the current slowing sales environment.

 SPF lists inventory on its books at $2.1 Billion dollars.  They recently sold some land at about $0.40 on the dollar.  If the rest of SPF's inventory is booked at similar inflated values, than SPF's inventory is worth something closer to $1 Billion dollars.  That is a problem when you have almost $2 Billion dollars of debt outstanding.................which doesn't even include another $1 Billion of OFF BALANCE sheet JV debt.

 SPF has about $1.4 Billion dollars of Senior Debt and another $600 million of payables and subordinated debt.  If its assets cannot even cover the Senior Debt holders, how can EQUITY analysts upgrade this company?  The Equity Analysts know that the carrying value on the books is no where close to the market value simply from SPF's recent sales, other builder's recent sales, and the fact much of SPF's land has NOT been impaired yet.

Further, how can analysts use improved liquidity as a basis for the upgrade when SPF likely started a bunch of homes at the end of the quarter that is going to consume millions to construct?

Based on an article in the Street.com, we know that SPF is working with the Blackstone's RESTRUCTURING GROUP.  Without having the assets to cover the SENIOR Debt outstanding,  and orders coming in about 40% BELOW last years reduced levels, why would equity analysts upgrade the stock?

 There just seems to be little factual basis to have a improved outlook for the equity of a company that is IN VIOLATION of its debt covenants for the third time, working with a professional  RESTRUCTURING group, and assets worth only a fraction of SENIOR debt oustanding with sales slowing materially from last years already lowered levels.

 How can equity analyst's think SPF's stock has any value when its assets are likely worth less than half its debt, margins evaporating, and revenues slowing to a trickle compared to just a few years ago?

 Centex's analysis may prove to be even more interesting.

16 Comments – Post Your Own

#1) On February 10, 2008 at 4:45 PM, FourthAxis (< 20) wrote:

Oh, you still listen to analysts?  Analysts are like movie reviewers.  You agree with some you don't agree with others. Neither crew has a clue though.

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#2) On February 10, 2008 at 5:38 PM, DemonDoug (32.19) wrote:

Alstry:

You have two choices when deciding on the question of "why does an analyst go positive on a stock when the fundamentals are terrible?"

1. The analyst is a liar.

2. The analyst is incompetent.

Incompetence is pretty self-explanatory.  As far as lying, well, people have their own motivations for lying either up or down on a stock.  It is up to you to decide which it is. 

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#3) On February 10, 2008 at 6:13 PM, dwot (43.80) wrote:

Good analysis Alstry...

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#4) On February 10, 2008 at 6:33 PM, alstry (36.27) wrote:

This situation is VERY different than any I have ever seen.

The current market value of SPF's assets are likely worth LESS than half its DEBT.

SPF fell into violation of its loan covenants for the third time at the end of this quarter.

SPF's backlog is about a quarter of its debt.

For a company working with restructuring specialists, one would think that SPF is contemplating restructuring.

For a business losing millions per quarter, whose assets are worth a fraction of its senior debt, and there is hundreds of millions of ADDITIONAL subordinated debt................mathematically, it seems impossible that an analyst can put ANY value on the equity considerings the facts of this situation.

 AGAIN, THIS IS NOT A DEBATE BETWEEN "X" VALUE OR "Y" VALUE, IT IS A QUESTION WHETHER AN ANALYST USING REASABLE CARE CAN PUT ANY VALUE ON THE EQUITY.

 

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#5) On February 10, 2008 at 7:05 PM, floridabuilder2 (99.31) wrote:

Alstry.... nice analysis however a couple points

SPF at the end of January had over 3,000 homes in wip and models........... most of that wip was at the cabinets and vanities stage and so 80% or more of the cost has already been built into the house........ the conversion of this wip in Q1 will not constrain cashflow......................  most of SPFs jv partners are well capitalized... will they have to put money in?  maybe, but they are will walk if they don't want to and I know people that would take SPF's place in some of those jv's

SPF has just over 14,000 finished lots and thus they have no cash flow obligations for land acquisition or developement in this respect..............

With $3 a share in cash another $3 coming in with tax rebates they will have more than enough cash to survive 2008........

One of the problems with valuing SPF or any builder is to understand what the mix of inventory is between raw unentitled land, raw entitled land, finished lots and WIP.........  because I know what the numbers are I can pretty much tell you that there assets aren't worth 40 cents on the dollar not even close... more like 85% of book............  LEN and PHM are different stories due to the large amount of raw land they own that has been moth balled or not marked down 

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#6) On February 10, 2008 at 7:10 PM, floridabuilder2 (99.31) wrote:

alstry........... do me a favor tonight sunday night............ go to the SPF website and pick two random communities that are selling in any state.........

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#7) On February 10, 2008 at 7:31 PM, alstry (36.27) wrote:

Here is one quickly, Indian Wells outside of Palm Springs.  New community open a year.  6-8 standing specs in the Million Dollar range....only one home sold in the entire community for past year.

Here is the link:

http://www.standardpacifichomes.com/findhome/NeighborhoodIntro.aspx?NID=1408

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#8) On February 10, 2008 at 7:58 PM, floridabuilder2 (99.31) wrote:

At the end of January they had 5 models and 7 finished specs with no wip units under contract.............  alstry..... I agree with you 100% that SPF on the surface has a lot of problems........  my point is that I have a lot of 3rd party information on all of their sites........

palo verde in the same area has 8 foundation starts, 4 finished spec, 3 models and 4 wip under contract

alcala at escena also in this area has 8 at foundation start, 8 finished spec, 3 models and 4 wip under contract........

prior to january I was the biggest bear on SPF and thought they were going to go bankrupt in 2008..... however, things changed drastically in January once I became privy to all their land positions and where their inventory dollars were...........  they have enough cash to survive in 2008, so for the time being they are a speculative buy...........  if they drop the ball during the spring selling season then yes I would line back up in your court

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#9) On February 10, 2008 at 8:04 PM, floridabuilder2 (99.31) wrote:

At the end of January they had 5 models and 7 finished specs with no wip units under contract.............  alstry..... I agree with you 100% that SPF on the surface has a lot of problems........  my point is that I have a lot of 3rd party information on all of their sites........

palo verde in the same area has 8 foundation starts, 4 finished spec, 3 models and 4 wip under contract

alcala at escena also in this area has 8 at foundation start, 8 finished spec, 3 models and 4 wip under contract........

prior to january I was the biggest bear on SPF and thought they were going to go bankrupt in 2008..... however, things changed drastically in January once I became privy to all their land positions and where their inventory dollars were...........  they have enough cash to survive in 2008, so for the time being they are a speculative buy...........  if they drop the ball during the spring selling season then yes I would line back up in your court

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#10) On February 10, 2008 at 8:05 PM, alstry (36.27) wrote:

"With $3 a share in cash another $3 coming in with tax rebates they will have more than enough cash to survive 2008"

They got $3 dollars in overhead, JV remargin and obligatioins, and Principal and interest payments Q1 alone.  Then almost another couple bucks if they wanted to clear out their revolver liability including LOCs.

"SPF at the end of January had over 3,000 homes in wip and models"

You are absolutely right about that, of the above homes 749 were completed specs many of which located in the lower priced states of TX, FL, and the Carolinas.  Since we know that SPF did NOT put back much more than $200 million into inventory last quarter (how do you think they ended up with a couple hundred million in cash? after spending $150 million on SGA and interest, $250 million paying down debt, $100 million on JVs, and $100 million for payables just for starters), and they had to spend some of that to deliver homes in Q4, they couldn't have spent much for future delivery.

 From this vantage point, based on the fact that Parnes represented on the CC that SPF had about a billion in WIP assets, the same as the end of Q3, it seems plausible that SPF planted a bunch of foundations, and NOT MUCH MORE, on expensive CA lots converting land into WIP and improving their borrowing base.

Further, if SPF resorts to selling its models in its active communities, then it is pretty much shutting down operations and the Senior bond holders will absolutely have to step in at that point before any more precious assets are spent on salaries, subordinated debt expenses, and JV spend.

As you know, one builds expensive homes on expensive lots, how do you come by your assertion that SPF is 80% complete?  Where do you get that figure from anyway?

SPF has a couple hundred million in land take down requirments.  It has a couple hundred million in principal and interest payments.  It has a hundred million in overhead plus selling expenses.  Another potential few hundred million in JV remargin expenses.......for a company inflating the value of its assets on its books, with only $443 in backlog and just 749 completed specs, how do you suppose their bankers will allow them to keep going on March 30th?  Based on last years 70% backlog conversion, SPF is on track to do under $300 million in revenues this quarter!!!!!!!!!!!!!!!!  It just seems too light based on current selling margins, CA build out requirements and fixed quarterly expenses especially factoring the cash flow risks in the current cancellation environment.

 The big issue between you and me at this point is what is the cost to complete WIP in order to generate revenues.  We know that the completed specs, if all sold tomorrow, couldn't generate much more than $225 million assuming a $300K ASP.

 

After you and I resolve this little issue, I got the feeling we are gong to have some  fun going forward.

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#11) On February 10, 2008 at 8:16 PM, floridabuilder2 (99.31) wrote:

In California alone they have 630 WIP past drywall stage... so my point is they just have to close the sales........  If WCI gets a green light to break covenants and they are in far worse shape, then I suspect the banks will reduce SPF's borrowing capacity but give them the green light to borrow to build spec homes

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#12) On February 10, 2008 at 8:18 PM, floridabuilder2 (99.31) wrote:

If you would like, next weekend I can do a counter argument in full detail?

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#13) On February 10, 2008 at 8:20 PM, alstry (36.27) wrote:

The community we just discussed has had only one sale in the past year and maintains the costs of employees and according to your data, twelve completed million dollar homes, plus operating expenses of keeping the community open.  You clearly know what this means.  That is just one community.

I think you are confusing the fact that 80% of their owned land is completed lots with 80% of WIP being completed.  It would be mathematically impossible that 80% of WIP was completed based on the fact that they sold $800 million worth of homes last Q, adding in ending payables, couldn't have put back in much more than a few hundred million, leaving at least $500 million to complete WIP. 

If you back out model homes and completed specs, I doubt SPF had 40% of WIP completed by the end of the quarter.  For the purposes of my March 30th analysis, I am assuming most of the completed specs are delivered in Q1.

 

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#14) On February 10, 2008 at 8:33 PM, alstry (36.27) wrote:

Not to beat a dead horse, but these guys know how third party analysts report and how to manipulate them. 

You state:

"In California alone they have 630 WIP past drywall stage."  The real construction expenses begin past past the drywall stage.

Almost everything WCI has is fully completed, not past the drywall stage.  In large part, WCI doesn't have to spend a dime to deliver its product.  From the banks perspective it is simply liquidating and any money coming in goes to pay for sales or the banks.  Not much leakage from the creditors perspective.

I am not sure if the structure of WCI's debt, but I doubt they have anywhere close to the JV spend which takes assets away from the senior bond holders as does heavy payments to subordinated debt holders. 

The KEY is how the debt is structured, where the cash coming in goes, and how much money a builder must pour back into WIP to generate revenues subject to heavy discounting and cancellations, that determines the banks attitude to any particular builder.

From this perspective, SPF is not looking good for the prom on March 30th.

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#15) On February 10, 2008 at 8:36 PM, alstry (36.27) wrote:

Not to beat a dead horse, but these guys know how third party analysts report and how to manipulate them. 

You state:

"In California alone they have 630 WIP past drywall stage."  The real construction expenses begin past past the drywall stage.

Almost everything WCI has is fully completed, not past the drywall stage.  In large part, WCI doesn't have to spend a dime to deliver its product.  From the banks perspective it is simply liquidating and any money coming in goes to pay for sales or the banks.  Not much leakage from the creditors perspective.

I am not sure if the structure of WCI's debt, but I doubt they have anywhere close to the JV spend which takes assets away from the senior bond holders as does heavy payments to subordinated debt holders. 

The KEY is how the debt is structured, where the cash coming in goes, and how much money a builder must pour back into WIP to generate revenues subject to heavy discounting and cancellations, that determines the banks attitude to any particular builder.

From this perspective, SPF is not looking good for the prom on March 30th.

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#16) On February 10, 2008 at 9:45 PM, CycleFreak7 (< 20) wrote:

My opinion is that analysts are in the pockets of the bigger brokerage houses and (probably) hedge funds. Either that, or they are utterly incompetent.

And yet, people listen to them.  Trouble is, you cannot tell which ones are good and/or honest and which ones are not. 

Case in point: That idiotic analyst at Oppenheimer who warned that Intuitive Surgical (ISRG) would lower 2008 guidance when they released earnings.

This caused ISRG to drop from $277 to $247 in a single day. When they did eventually release earnings, they blew away estimated earnings (again!) and made no mention of contracting in '08.  The stocked jumped more that $50 to over $300 / share.

There was no such warning about Apple (AAPL) prior to their earnings release.  Look what happened there. 

So, either the analyst was an outright liar helping his 'friends' get into ISRG at a lower price, or he is a complete moron.

Either way, he (she?) should lose his (her?) job. If I was that bad at my job, I would not have it for long.

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