Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
Tuesday, January 24, 2006
Inventory Piles Up At Centex By The $Billions
The homebuilder Centex had result out this afternoon. "U.S. home builder Centex Corp. said on Tuesday its fiscal third-quarter net earnings rose 30 percent as it sold more homes at higher prices. 'The long-term fundamentals driving the industry remain strong, and we continue to see opportunities to gain market share in a more normalized housing environment,' said Tim Eller, Chairman and CEO of Centex Corporation."
But why can't the firm generate enough cash?
For the nine months ending 12/31/05, in millions:
$898 -Net Earnings
49 -Depreciation/amortization
(33) -Other
(2,255)-Increase in Inventory
224 -Other Operating
(912) -Increase in Loans Held For Investments, (These are MBS's)
124 -Other Investments
1,782 -Increase in Short-Term Debt
114 -Issuance of Long-Term Debt
(461) -Other Financing Activities
(2) -Exchange Rate Effect
(424) -Net Decrease in Cash & Equivalents
On March 31, 2005, the firm had $503 million in cash. By the end of the year they had $79 million. Centex had a year end accounts payable of $2.4 billion. Total inventory grew from $6.43 billion to $8.67 billion over the same period. Now we know why the company is running specials.
The firms 'Lot Position' is up 14% as well.
Lots owned..106,597
Lots controlled..187,126
Total..293,721
This is the same dangerous game the public builders have been playing for years. Borrowing short term, building and buying land like crazy. And the whole thing works as long as they keep growing. And borrowing. If sales even level off, or Wall Street cuts back on lending, how will they pay back the billions in debt? With lots or subdivisions?
ReplyDeleteYeah, Ben...I can't believe (literally) the reports of how "great" things are via the builders! The AZ Republic trips all over themselves to quote builders spewing glowing reports about subdivision "strength" in AZ and the massive land escrows...at the same time the builders are advertising non-stop on the local radio about their special "incentives" and price cuts.
ReplyDeleteSchizophrenic!
I'd be curious to know what % of those 293,721 owned or "controlled" lots were purchased recently (at bubble-inflated prices) or a long time ago. This would make all the difference in evaluating Centex's overall position.
ReplyDeleteIf they bought most of the land 4+ years ago, they may have little problem continuing to build and sell at a profit, as they could slash prices drastically and still earn a nice profit. if not, that's another story.
A lot of bloggers here have been speculating for some time that major builders like Centex will be largely unaffected by the post-bubble price declines, as they have such a giant spread between current selling price and net costs (original land purchase price + construction, advertising, etc). As long as they haven't overbought too much land recently, they should be able to discount aggresively (-30-50%?) and still turn a nice profit well into the decline.
ReplyDeleteIt's the recent underwater IO/neg-am buyers & amateur flippers who will be f@cked the hardest.
Odd, sometimes comments just seem to get swallowed up in the blog-ether. Oh, well --re-post...
ReplyDeleteIf Centex purchased most of it's inventory more than 4 years ago, then they should have no trouble slashing prices anywhere from 30-50% and still make a tidy profit above what they paid (land + construction + marketing/overhead). They might be able to profit all the way to the bottom.
Joe McDebtor with his 100% LTV neg-am won't be so lucky.
Went to the two Centex subdivisions in Modesto for the big sale. These are houses selling around $500k.
ReplyDeleteOne had had only one home at the sale price, and it had sold long before my arrival at 2:45. They claimed to be completely sold out except for three of their largest model, not on sale.
The other development was offering about 8 homes at $40,000 off. Some were already built; some weren't. No news on whether they sold. The free food in the first model sure made the house look better, though.
Other builders' subdivisions in town were pretty dead, probably due to lack of free chow. Rumor has it that Richmond American's new tract was on recently bought land, and that they paid a really scary amount (do I believe $650,000 an acre? is that humanly possible?) to get land that wasn't subject to Mello-Roos fees.
Oh -- a comment on another article here reminded me -- Did you notice that Centex's discount required that you use their lender?
ReplyDeleteI looked up the corporation. Centex builds homes, provides mortgages, has a title company, and offers pest control.
It'll be interesting to see how investors react to the news tomorrow. Will they just read the first part of increased earnings? Or will any of them worry about inventory "balloon"?
ReplyDeleteRyland reported tonight. 'However, new orders in the fourth quarter of 2005 decreased 4.7 percent to 3,066 units from 3,217 units for the same period in 2004'
ReplyDeleteTulips,
ReplyDeleteI'm glad you mentioned the MBS's. If I recall, they were up $900 million in the past 9 months. If they are having to borrow short-term heavily, and considering the yield on mortgages, that's probably a slim profit. It's more likey they are keeping these loans because the market is discounting their paper.
As far as selling at a profit goes, thing is, they have to sell enough units to pay their expenses.
ReplyDeleteEven if they bought their inventory 4 years ago, and it all appreciated 100%+, that's just paper money. Until they sell it, it's costing them money to hold on to it. (Aside: I wonder how good they are at avoiding/minimizing property taxes...)
I just did a quickie Excel sheet showing the cumulative net position of a developer given the parameters of %of inventory sold, appreciation, and carrying costs, assuming a starting appreciation of 100%. As far as how good CTX and other realtors' prospects are, it's interesting to play with. It gets quite interesting, of course, when appreciation is negative.
The file is here.
enron,
ReplyDeleteCTX insider sales:
http://finance.yahoo.com/q/it?s=CTX
check,
ReplyDeleteA real skeptic would point out they are borrowing short-term to support the stock.
It's wonderful to buy back five million shares. Yet, according to the release, using the nine month figures to compare 06's versus 05's Average Shares Outstanding,:
ReplyDeleteBasic 127,933,898 124,404,141 3%
Diluted 133,954,277 131,702,753 2%
So share count is rising despite this expediture of cash. This isn't unique to Centex of course. Abundant option grants and subsequent insider sells are the culprit...
From a Centex short,
RoA
Question for you all--
ReplyDeleteI'm in a place where the median house price is something like $180,000. Pretty cheap, but jobs aren't great either. Inventory is up 15% since the first of the year already, and the current population-to-1+ bedroom home ratio is 1:125. Pretty low. Does this mean anything? Still haven't seen much of a sign of slowdown (prices up 50% in five years). But something tells me a price drop is coming in 2006 or 2007.