ONCE A CORNERSTONE OF WALTER Industries, Jim Walter Homes has proved of late to be the diversified corporation's weakest link. The home building subsidiary continues to post dismal financial results, fueling rumors of a potential sale or fold.
The builder reported a third-quarter operating loss of $10.5 million, compared to a loss of $9.6 million a year ago. The loss reflects declining deliveries, stagnant sales, hurricane-related repair costs, and a struggling modular housing business.
And although Walter Industries' board of directors has attempted to unlock more shareholder value by undertaking an initial public offering and spinning off its water products business, it may not be enough. The decision essentially divides the corporation into a “pure play” water infrastructure company and a “pure play” coal company, leaving the home building segment generating little value for the corporation's overall health.
Investment banker Tony Avila, a managing director for JMP Securities, says that the home building operation falls short of being a good acquisition candidate. As an on-your-lot builder, it lacks a crucial source of value: land. “Their business model is not focused in the high-growth markets,” Avila explains. “They're geographically challenged.”
For the time being, Walter Industries' board of directors says it's committed to returning the home building division to profitability. But how they will appease pressure from shareholders—Pirate Capital in particular—to grow profits remains to be seen.