Tuesday, March 06, 2007

Calls of Note Part 2

Wachovia out with a nice overview of their key impressions from 2nd Annual Wachovia Homebuilding Conference, which was held March 1st and 2nd in Las Vegas.

Sales trends continue erratic. In general firm believes the Spring selling season has been at least a mild disappointment for most; traffic levels seem firm, but sales activity soft. The exception is CA, which several companies mentioned as rebounding nicely (SPF, TOL, CTX). FL was regularly described as the state with the most widespread weakness. Opinions were mixed but biased towards signs of stabilization in the DC metro and mixed but biased towards weakness in TX. DHI seemed more pessimistic about conditions; SPF more optimistic.

Downturn duration expectations extending. Likely as a result of a so-far sluggish Spring, firm felt some builders seemed to be tempering their outlooks for their business. Firm liked HOV CEO Ara Hovnanian's characterization of this recovery as potentially a boat hull, or a long period of flatness before a gradual rise. To paraphrase him, whether the hull is the size of a Boston Whaler or the Queen Mary has yet to be seen.

Sub-prime not a worry (yet). Most builders do not expect problems in the sub-prime market to spill into substantially-tightened lending standards for the prime market, and on average firm believes builders feel that sub-prime customers represent 10-12% of total business.

Builders making headway in labor cost savings. Several builders reported increasing concessions from trade subcontractors, on the order of 5-7% labor cost reductions in select markets, which should begin bolstering margins in 2H07.

Pay down debt in the short run, re-grow in the long-run. Of course firm continues to hope for a more permanent focus on free cash flow by builders even after the cycle rebounds, and more measured additions to lot supply coupled with bolstered share repurchase activity. In the short run, however, most appear to be focused on reducing debt or maintaining current debt-to-cap levels, while keeping an eye out for opportunities to re-invest in land.

Little commentary on M&A potential. While many builders believe the industry likely to consolidate in the long run, few expect substantial public-to-public merger activity in the near-term. Some commented that substantial liquidity is likely to move towards the distressed-land and distressed private-builder markets rather than into public builder private equity takeouts.

Notablecalls: Not actionable, but very good to know category.

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