Coming into the public home builders’ recent earnings season, fear and loathing seemed to be the main threads.
“There was a lot of pessimism,” says Stephen East at ISI Group. “People were worried about margins coming down. They were worried about guidance with oil and taxes and future margin guidance and all of that.”
And, after the calls? There was a sigh of relief. Texas seems to be holding up so far, January was stronger than expected, and while margins are shrinking, it’s not the end of the world … yet.
“The big takeaway is that it was definitely better than investors imagined,” East says.
BUILDER sampled a few analysts (and read the reports of others). Here's what they pinpointed as the biggest trends from earnings season.
It shouldn’t be a surprise that the publics indicated margins would be smaller in 2015. Home price appreciation has slowed, incentives could be increasing, and land costs have risen.
“That’s been a trend in terms of guidance for 2015,” says David Goldberg from UBS. “Margins are definitely coming down.”
KB Home started earning season by reporting its near-terms margins would trail fiscal year 2014 and that it would not achieve its target of at least 20% during the upcoming year. While other builders produced gross margins only modestly below estimates of analysts like J.P. Morgan’s Michael Rehaut, margins were definitely a theme.
“Specifically, of the eight builders that issued specific 2015 gross margin guidance, the average expected contraction versus 2014 and fourth quarter 2014 levels has been 80 basis points and 30 basis points, respectively,” Rehaut said in a report.
All wasn’t negative though. D. R. Horton reiterated its gross margin projections from last quarter.
Morgan Stanley’s Haendel E. St. Juste thinks margins will decline slightly this year if we don’t see dramatic improvement in top line orders.
“Jobs, wages, and credit availability is key,” he says. “If more credit becomes available, that could drive top-line orders growth. That could expand margins.”
In 2014, Houston was the largest home-building market in the country. And despite a diversified economy, oil still drives Space City. So, naturally, analysts were concerned about how builders in the city were holding up.
“We’ve seen job growth forecasts cut dramatically [for Houston],” St. Juste says. “They went from 120,000 down to 60,000. A lot of MSA’s would love to have 60,000 jobs, but Houston has large amounts of supply on both the multifamily and single-family sides. Clearly that impact on jobs will affect demand and pricing [for housing].”
But, anecdotally, Houston seems to be steady. “One the big trends [in earnings calls] was this concern about Texas and it feels like Texas is holding up pretty well,” Goldberg says. “You haven’t seen much of a slowdown, if any at all. “
But Goldberg admits some of this could be “a little bit of pause before the storm” if oil prices stay down for an extended period.
“I’m surprised at the builders’ optimism in Texas,” he says. “If I owned a home builder and had exposure to Houston, I’d be a little concerned right now. But even the guys who are in Houston don’t seem to be overly concerned.”
With the polar vortex-fueled bitter cold of January 2014, many home seekers stayed at home. So, despite bad snow in the Northeast, January 2015 had to be better. Analysts seemed pleased with the results.
“The builders are telling us that the last two weeks of January were pretty strong,” Goldberg says. “Traffic numbers were up a lot. Some of that could be easy year over year comps. But builders are feeling better about January than they were in November and December.”
In his report, Rehaut pointed to Pulte, Ryland, Taylor Morrison, and Standard Pacific as strong performers. “… the commentary from the remaining majority of builders [outside of Lennar and KB] so far this earnings season has been largely positive, pointing to positive order trend momentum through January, while additionally, incentives have not been highlighted as a negative issue and have largely been depicted as fairly stable,” he wrote.