As hard as it may seem, there is indeed other news out there.
Though the credit crisis is integral to the future of Wall Street, Main Street, and everything in between, investors should still keep an eye on individual stocks as they manage their portfolios.
These individual stock stories can provide clues into the health of an industry and valuable information that the market can use to value underlying stocks. As the price of a stock is a discounted value of future cash flows, real news can shed light on the accuracy of our projections.
Take for example the homebuilding industry. The difficulty in predicting the future of the sector results in stock prices that tend to be quire volatile (see, “Toll Brothers (TOL): Nothing to Write Home About“).
The market has expected a bottom in the homebuilding space that for much of 2008. That bottom has yet to materialize, even though homebuilding stocks have been some of the best performers in a difficult year.
Now we get more evidence of the bottomless pit with the release of Lennar Corp.’s (LEN) fiscal third quarter results.
One of the nation’s largest builders, LEN announced that the company lost $0.56 per share as compared to the estimate of $0.52. The losses actually narrowed from previous quarters as a result of large cost cutting efforts by the company. More troubling though is that revenue dropped by 53%.
In the period, LEN generated $1.11 billion down from $2.34 billion in the year ago quarter. Deliveries of new homes dropped by 49% with average home price down by nearly 10%.
Guess what? The stock is up on the news, at least as of this writing. We’ll see if it holds.
There was no word from the company on when the crisis can be expected to end. Instead, we hear that foreclosures and supply continue to weigh on the company.
In response, LEN is… > …aggressively cutting construction costs (tough to do when commodity prices are rising), cutting jobs and consolidating divisions. About the only good news from the report is that the company has a war chest of cash totaling $857 million at the end of the quarter. Such amount will help the company weather the storm.
The question for investors is when that storm ends, what will the company look like. Can they make money? Will they increase book value?
It is that book value that ultimately determines the value of LEN stock. If there are further reductions in assets, including land owned and homes built but not delivered, book value will go down. Many analysts expect write downs of assets to continue to the tune of $200 million or more.
Going further once the storm dissipates, the growth of that book value will determine the success of investing in the stock. From that standpoint, the news is not encouraging. Backlog of homes under contract declined to 3,554 units as opposed to 6,367 units at the end of August, 2007. Cancellation rates did drop from 32% to 27%, but that number is still high by historical standards.
When a home does not sell it resides on the company’s balance sheet. It is far more likely then that the home will sell at a discounted rate resulting in more write downs. We are far from out of the woods here based on LEN’s numbers. The cycle is stuck in perpetual state downward. Indeed the bailout of Fannie Mae and Freddie Mac has resulted in lower mortgage rates, but the excess has yet to be rung from the system (see also, “Fannie-Freddie Bailout: What It Means to You“).
It would appear that home prices need to fall much further before we hit bottom. Will the cash on LEN’s balance sheet be enough? The risk of owning the stock without that answer would be too high in my opinion.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.