PUBLIC HOME BUILDERS' earnings announcements this spring—largely a show of how far the sector has fallen since early 2005—were often followed by downgrades of the companies' stock ratings by industry analysts.
William Mack, a housing analyst with Standard & Poor's, was positive on most builders through 2005. Now, he has “sell” or “strong sell” recommendations on six of the 15 builders he covers. “There's a tremendous amount of uncertainty out there about how long the downturn will last,” he says.
He counts Toll Brothers as his one positively recommended builder, citing the company's wealthier customer base, comparatively low cancellation rate, and candor in addressing the market softness. “They started buying back shares the earliest, and they have as much success and experience as anybody weathering these cycles,” he asserts.
Not everyone agrees with Mack's theory. Greg Gieber, an analyst at A.G. Edwards, downgraded the company to “sell” due to his concerns about weakness in high-end homes. His forecast of a 19 percent drop in the company's orders this year is close to reality: Through 2006's first two quarters, Toll's sales are down 26 percent against the same period in 2005.
Until recently, many analysts agreed on a positive outlook for D.R. Horton, which announced in April that its second-quarter sales increased 10 percent over the same period in 2005. Weakness across the sector led Wachovia Securities in early June to downgrade Horton from “outperform” to “market perform” and Banc of America Securities analyst Daniel Oppenheim to reduce his expectations for the company's earnings and stock price.
