Most home-building companies are expected to report higher year-over-year results for the fourth quarter, driven by easy comparisons and order trends that were strong in the first few months of 1996 — before interest rates started to rise and orders slowed in the spring.
Defying earlier predictions that order trends would remain weak in the final months of 1996, orders also began to pick up in November after two months of double-digit percentage declines, brightening the outlook for 1997.
Analyst Ivy Schneider, with Salomon Brothers Inc., said lower interest rates and improved order trends between the spring of 1995 and the spring of 1996 should lift earnings in the fourth quarter.
Indeed, the Commerce Department last week reported that sales of new, single-family homes jumped 14.2 percent to a seasonally adjusted annual rate of 772,000 in November. The increase, the largest since April 1993, erased a 13.3 percent drop in new single-family home sales in October.
Providing a preview of what to expect from the industry, Continental Homes Holding Corp. last month reported earnings of 81 cents a diluted share for its second quarter ended Nov. 30, compared with 64 cents a year ago.
The Scottsdale, Ariz.-based builder’s home-building gross margin was flat compared with a year ago, at 18.4 percent in the quarter. New orders also were flat with a year ago, at 972 units, but showed a modest rebound in November and December, Schneider, of Salomon Brothers, said.
Analysts expect similar trends from the nation’s top builders, including Centex Corp., Pulte Corp. and Ryland Group Inc.
Dan Denbow, with Principal Financial Securities, estimates that Centex, based in Dallas, will report earnings of 82 cents a share for its fiscal third quarter ended Dec. 31, compared with 52 cents a year ago and 96 cents in the second quarter.
The company had a solid backlog and — unlike some of its competitors — relatively good margins in the quarter because “there was not a lot of discounting in these numbers,” Denbow said.
Denbow projects the builder’s orders for the quarter “could be down in the high single digits or low double digits, which is a nice improvement over last quarter.” Centex’s orders were down about 22 percent in its fiscal second quarter, he said.
Noting that Pulte also had a “pretty good backlog going into the quarter,” Matthew Roswell, of Legg Mason Wood Walker, said he expects the Bloomfield Hills, Mich.-based builder to earn 95 cents a share in its fourth quarter. The company earned 86 cents a share from continuing operations a year ago.
Schneider projects Pulte’s new orders were flat to slightly lower compared with a year ago.
Roswell predicts that Ryland, based in Columbia, Md., will post 29 cents a share in its fourth quarter, up from 17 cents excluding charges last year. The company’s backlog, he said, was “OK, not wonderful.” Schneider estimates the company’s new orders were down about 10 percent in the quarter.
Until November, most analysts were predicting that order trends — which started to weaken in May after interest rates rose between February and July — would remain slow through the end of 1996 and put pressure on builders’ earnings in late 1996 and early 1997.
According to the Mortgage Bankers Association of America, the average contract rate on a 30-year, fixed-rate mortgage rose from 7.08 percent in February to 7.62 percent in March, 7.93 percent in April, 8.07 percent in May, and 8.32 percent in June.
