Friday, December 14, 2007

Builders-No Bottom in Sight

This report was not put together by me, but by a trusted source. This info may be a day late and a dollar short, but for those of you eyeing a bottom, stop it. Standard Pacific is just waiting to go out of business, but I think puts provide too little reward at this point. Just to fill in a little info, SP and Lennar have tons of land in CA, AZ and FL. Enjoy.

I wanted to share with you guys some recent research I’ve done on the building industry with an eye on shorting some of these stocks, as well as who might be a good long-term stock purchase. My research was geared to determining who are the worst-capitalized builders and most likely to face liquidity problems/bankruptcy. My method was to look at: (1) the company’s cash on hand against total debt; (2) debt service burden; (3) available lines of credit and whether any of these lines have been drawn down.

This list runs from worst to best. All numbers are approximate:

Hovnanian: $2.5 billion debt; $25 million cash; appox. $300 million remaining on credit line (app. $450 million drawn)

Standard Pacific: $1.9 b; $22.3 m; $256m (after draw downs)

Centex: $5.3 billion debt; $380 million cash; $1.35 billion credit line (no draw)

Beazer: $1.76 billion debt; $224 million cash; $1.1 billion credit line (800 million drawn, so 300 million available)

D.R. Horton: $4.9 billion debt; $4.9 million cash; 1.7 billion credit (small draw); Note: According to Value Line, D.R. Horton is holding a large amount of land relative to other builders. This is a potential problem for a reason I discuss below.

KB: $2.8 billion debt; $272 million cash; $1.2 billion credit line (no draw down); Value Line: lots of sub-prime and entry level buyers

Pulte: $3.9 b debt; $74 m cash; $2.25 b credit (? Drawn)

Lennar: $3.6 b debt; $672 m cash; uncertain credit line (had trouble determining); Note: Value Line regards Lennar as one of least leveraged builders

Ryland: $1 b; $84.5 m; $871 m credit (small draw down)

NVR: $200 m; $74 m; $150 m available on credit line (after drawing $450)

MDC: $2 b debt; $670 m cash; 1.75 b credit line (no draw); Note: Value Line says lower land holdings than others

St. Joe: $428 m; $20 m; $500 m (small draws)

Toll: $1.9 b; $771 m; $2 b (no draw downs)

There is some information missing so, if anybody fills it in, let me know. I’ll leave everybody to draw their own conclusions here. One factor I have not quantified is how much land and constructed houses each builder is holding. This is important because builders holding lots of assets on their sheets now may be forced to write them down (as some have already done). Such write downs will affect borrowing limits (credit lines are often tied to value of assets). Some further projects if anybody is game:

Current value of land and unsold houses held by each builder;
Whether company has taken any asset write downs yet (if not, this could be a sign of bad news to come)
Where company’s land is located (Florida, Texas, Calif., Nev. are all experiencing steep property value declines)

The doomsday scenario here for builders is property values continue in steep decline, they can’t generate enough cash to operate their business, have to take asset write downs, the asset write downs cause credit to dry up, and suddenly they have to fold up shop

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