Wednesday, October 06, 2004
Copyright © Las Vegas Review-Journal

Stocks plunge; analysts shrug

Observers say LV housing sturdy despite sell-off

Home-builder stocks continued to fall Tuesday, a day after Pulte Homes reduced its earnings forecasts because of a slowdown in sales in Las Vegas, its second-largest U.S. market.

Despite the sell-off, analysts said home-builder stocks and the Las Vegas housing market remain good long-term investments.

Pulte, headquartered in Bloomfield Hills, Mich., and the second-largest home builder in Southern Nevada since its purchase of Del Webb, created a panic late Monday when it announced that it was reducing its earnings guidance for investors. It attributed the lower outlook for profits to a drop in sales in Las Vegas, possibly the hottest housing market in the nation the past year, and the need for price cuts at some of its local developments.

The Dow Jones Home Construction stock index slipped 2.1 percent Tuesday, following a 5.1 percent plunge Monday. Analysts blamed the two-day plunge on investors who assumed that one company's problem in one area, Las Vegas, reflected the end of good times for home builders nationally.

In truth, analysts argued Tuesday that the housing market remains strong nationally and in Southern Nevada.

"Overall, builders are still raising prices, but not to the degree they were in the first part of the year," said Dennis Smith, president of Home Builders Research.

He expects that prices for used houses will remain flat or decline a little.

Smith foresees problems in the resale market for houses in the $300,000 to $400,000 range because of oversupply.

"Under $300,000 is still very, very good," he said.

Smith said Pulte, which cut prices 5 percent to 25 percent over the past week at 18 of 23 Southern Nevada developments it markets under the Pulte name, and all four of its Del Webb division communities in the Las Vegas and Henderson area, "just got too aggressive on their pricing."

"The supply-and-demand equation has changed," said Sheryl Palmer, Nevada area president for Pulte Homes. "That's simple economics."

One Pulte home originally priced at $593,000 had been reduced to $425,000 and one home in Sun City Anthem was reduced from $656,000 to $499,000.

Palmer said Pulte did not plan price cuts in its other 44 markets around the country, and did not believe the housing bubble had burst in Las Vegas.

"I can tell you this is an isolated issue here," she said. "What we're doing is recognizing the market is shifting, not burst."

In addition, Pulte did not restrict sales to sales to investors as much as some builders, he said.

On Monday, Pulte Homes disclosed that it cut prices in Las Vegas and trimmed its guidance for earnings per share from the year's continuing operations to the $7.40-$7.70 range from $7.80-$8.

"Consumer acceptance of these increases at certain price levels has apparently reached a ceiling, suggesting that prices have become higher than what the market will support," Pulte Chief Executive Officer Richard Dugas Jr. said in a statement.

Pulte shares plunged $3.88, or 6.89 percent, to close at $52.45 in heavy trading Tuesday. They were almost 15 percent below the closing price of $61.63 on Friday.

"Are prices in Las Vegas falling down, or did Pulte put in a price hike that did not hold?" asked Gregory Gieber, an analyst with A.G. Edwards & Sons. He suggested Pulte "priced themselves out of line with everybody else in Las Vegas."

"It's like a rookie fumbling the football, but the coach called a great play," Gieber said, suggesting Pulte did not execute the company's strategy well in Las Vegas.

The scare spread quickly to other home builders on Wall Street. Shares in KB Homes have dropped 5.7 percent since Friday's close. Also, Beazer Homes USA shares have plunged 4.7 percent since Friday; D.R. Horton, 8.3 percent; MDC Holdings (Richmond American Homes), 6.6 percent; and Lennar Corp. 6.2 percent.

"I think there's opportunity created by the sell-off today," Gieber said. "It may take some time for this to work out, for people to realize this is overreaction.

"(Homebuilders) will continue to grow their earnings at a healthy rate, and there's money to be made for investors," he said.

John Buckingham, manager of the Al Frank Fund and editor of The Prudent Speculator in Laguna Beach, Calif., gave a similar assessment.

"It is an isolated, company-specific issue," Buckingham said. "I think it's an excellent opportunity to be buying."

He favors Beazer, Centex Corp., Standard-Pacific Corp. and Hovnanian Enterprises.

"I think the (home builders') earnings are going to continue to grow for the foreseeable future," he said. "There is just not enough housing, and there is too much demand, and I don't see this situation changing anytime soon."

Home-builder earnings are growing at double-digit rates for the rest of the decade, but their shares trade for single digit price-earnings multiples, he predicted. The p-e multiple is the price of the stock divided by earnings per share for 12 months.

Although housing stocks look attractive to him, he believes short-term investors are focused on headlines, rather than fundamental financial information. In the past, home building was cyclical, moving from boom to bust, but he said the industry has become a steadier performer.

In earlier years, small builders constructed new houses on speculation that they would sell and concentrated their activity in a limited geographic area, unlike large home building companies today that are active around the country.

"Builders found religion. They understand they need to run it like a business, and they can't be riverboat gamblers like they were in the past," he said.

The Associated Press contributed to this report.