Buy Low, Cross Fingers!
Given the state of the housing market, it’s not surprising that Meritage Homes Corporation (MTH), a big builder of luxury homes out West, reported a net loss of $119M for the last quarter. In this lengthy press release yesterday (containing an error that was corrected today), Meritage announced that its revenues from home closings were down 34% from third quarter 2006, with breathtaking declines of 65% in Nevada, 58% in Arizona, and 50% in California. And in a pessimistic-sounding move, the company took substantial write-offs of goodwill based on its expectation that ‘”he downturn of the housing market will be deeper and longer than previously anticipated.”
Nevertheless, Meritage threw in this cheery quote from Chairman and CEO Steven Hilton, exclamation point and all: “For those considering a home purchase as a long-term investment, and eager to enjoy the many benefits of home ownership, we hope they conclude that now is a great time to buy a home!”
Thanks, Steve, but I think I’m going to pass.
RSS
October 26th, 2007 at 7:50 pm
Hi Wendy,
What interests me about this, and homebuilders in general, are the goodwill impairments which are exacerbating the fundamental (sales) declines. Granted, sales and real stuff are, er, dropping fast. But the stock’s been pummeled, too. I don’t own homebuilders but MTH is now below book value (0.72 trailing P/B). Clever money is sometimes contrary right about now, when others are ducking for cover.
Re: the impairment, this $119 MM loss is net of about $200 MM goodwill (paper) impaired. Apparently, they were cash positive before the goodwill charge? I don’t see enough talk about FAS 142 in real estate, which puzzles me. Previously, goodwill was methodically reduced (amortized), now it’s impaired on occasion. So, analytically, I’d be interested in the specifics of the impairment because impairments result from FORWARD-LOOKING valuation estimates (models, appraisals). This may exacerbate over-reactions. The press release mentions the impairment is a “consequence of valuing divisions based on declining stock prices” so, if those prices (whatever they are?) are oversold, the impairment is a sort of double-whammy. Finally, it’s still a forward looking valuation based on economic outlook, etc. And it’s asymmetric, goodwill does not “impair up.” Errors on the downside will be realized in actual gains, maybe by folks who were right to buy now with contrary view. My guess is that a big reason analysts are whiffing the homebuilder numbers is the FAS 142 fair value - b/c it’s internal forward looking valuation, it’s not only volatile but hard to predict.
October 29th, 2007 at 4:58 am
It’s not goodwill writedowns that are the big hits - it’s the asset writedowns of unsold housing stock and especially the writedowns on things like joint ventures and partnership interests.
Take a detailed look at the balance sheets of most homebuilders and you’ll see a bunch of book value is tied up in highly leveraged partnership / joint venture building options. A drop of 10% in the value of 5X leveraged JV drops 50%.
My take is that most of the discount to BV is due to these writedowns vs. goodwill writedowns.
October 29th, 2007 at 10:26 am
The recent meltdown in the Credit markets make it nearly impossible for anyone in the San Francisco Bay area to get a mortgage. For a Jumbo loan which is 98% of the houses, you need to prove income of $350,000 or more. Plus you need $200k of Reserves in the bank.
Basically all home sales in the Bay area have come to a halt. Realtors are sitting on their hands until the Credit market changes, Meritage, KB home, Lennar, and Toll Brothers are going to take a major loss.
Regards, Hanz
October 29th, 2007 at 10:29 am
We could see some consolidation by the big builders. Meritage and KB homes possible buyout?
thanks-
Hanz
October 29th, 2007 at 3:20 pm
Matt,
Point well taken. Even in regard to those writedowns (partnerships & options), if i analyzed this sector, and I don’t, I would be tempted to distinguish between market-based writedowns and model (appraisal)-based writedowns. It seems one thing to impair based on unsold inventory & lower prices (mark to market) but another to impair based on market-to-model because mark-to-model seems esp. prone to model risk right now; if the building options are forward-looking, they might overrotate by incorporating downbeat economic forecasts.
But i guess i don’t understand if a homebuilder’s balance sheet is, overall, fair value or is it a mix of book (historical cost) and market value (do the impairments imply revaluation of all BV or only acquired stuff?), under FAS 142?