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Big Homebuilders Button Up

Major industry players Beazer and Pulte won't offer earnings guidance for '07 as the sector's problems deepen

The surprise on Apr. 26: neither Beazer Homes USA (BZH) nor Pulte Homes (PHM) dared forecast their business results in 2007. Their caution underscores how the meltdown in the housing market has made it challenging for businesses to carry on as usual and predict what happens next. While both homebuilders said they got crushed during recent months, market players had already been expecting to hear about losses.

Beazer Homes said Apr. 26 that it lost $43.1 million, or $1.12 per share, during the three months ended Mar. 31, compared to a profit of $104.4 million during the same period last year. The Atlanta single-family homebuilder also withdrew its previously-issued earnings forecast for 2007; analysts surveyed by Thomson Financial had been expecting a 14 cents loss during the March quarter and $1.49 lost in the fiscal year ended September, 2007.

"Given current market conditions, and the low visibility as to when conditions may improve, the Company is not comfortable at this time updating its earnings per share outlook for fiscal 2007," Beazer said in a statement Apr. 26.

Beazer wasn't the only one. Pulte Homes lost $85.7 million, or 33 cents per share during the first quarter ended March, compared with $262.6 million of net income during the same period last year. The Bloomfield Hills (Mich.)-based homebuilder did venture a forecast that it will have break-even to a loss of 10 cents per share during the second quarter - but that's exclusive of any additional land-related charges. The consensus estimate was for 37 cents lost during the March quarter, 6 cents earned in June, and 13 cents lost during the year ended December, 2007

Now Pulte Homes isn't saying anything about what happens after June. "Due to the lack of earnings visibility, difficult market conditions that exist today and uncertainty regarding possible land-related charges going forward, we are not in a position at this time to provide guidance for the remainder of 2007," Pulte Homes CEO Richard J. Dugas, Jr. said in a press release after the market's close on Apr. 25.

Pulte Homes and Beazer, along with many others with exposure to the housing market, continue to face uncertainty during the months ahead even after doubts already ravaged the subprime lending industry during recent weeks. As foreclosure rates rise, the market has been barraged with bad news from companies that lend to people with poor credit. The subprime lender New Century Financial said Apr. 2 that it filed for Chapter 11 protection and laid off more than half its 3,200 workers. Concern has been growing that the fallout from such debacles will hurt consumers, homebuilders, lenders and the broader economy.

Adding to the financial clouds are regulatory troubles. News hit on March 27 that the North Carolina field offices of the Federal Bureau of Investigation, the Internal Revenue Service, Inspector General of Housing & Urban Development, and the Justice Dept. have opened a criminal probe into lending practices, some financial transactions, and other dealings at Beazer (see, 3/27/07, "Feds Are Investigating Homebuilder Beazer"). The company, which also faces a securities class action lawsuit and a putative homeowner class action lawsuit, said Apr. 25 that a second homeowner class action lawsuit has been filed in South Carolina against "certain of its current and former executive officers and directors" regarding breaches of fiduciary duty related to the mortgage business.

The question remains as to how much more bad news investors will hear during the coming months. Beazer Home shares slipped 0.1% in early trading on the New York Stock Exchange Apr. 26. In a sign of how inured the market is to news of homebuilder losses at this point, Pulte Homes gained 4.2% to $29.06 per share. Other homebuilders also gained value. Shares of the largest builder by volume, Fort Worth-based D.R. Horton (DHI) edged ahead by 0.1% to $23.39 per share,; Toll Brothers (TOL) rose 2.6% to $30.33, and KB Home (KBH) gained 3.1% to $45.44 per share.

The homebuilders aren't the only ones struggling to carry on with business in the face of uncertainty. H&R Block's (HRB)'s CEO Mark A. Ernst had slapped a for-sale sign on the company's subprime lending unit Option One Mortgage Corp. back in November, confident he could get $1.3 billion, but then the months passed with no formal bids (see, 3/15/07, "Option One's Dwindling Options"). The tax preparer on Apr. 20 finally announced a complex agreement involving the sale of the troubled home-lending unit. But market conditions being what they are, H&R Block and OOMC Acquisition Corp., a newly formed company affiliated with the private investment firm Cerberus Capital Management, L.P. don't plan to calculate the price until the deal closes during the quarter ended Oct. 31.

Beazer CEO Jim O'Leary was willing to say he expected trouble a few months ago. During a conference call in November, he'd said the market downturn had given Beazer Homes the opportunity to crawl over every home and unfulfilled order, making "sure we're not kidding ourselves ... We don't want to find out we have any more homes than we have to" if the market doesn't come back, he'd said.

When asked to further clarify the information about his company's contract cancellations, O'Leary had said Beazer let go of a quarter of its workforce in October, during a time of seasonal weakness, and there were a lot of distractions happening at once to weigh people down. "The difference between terrible and horrible is a shade of gray that I can't define for you," O'Leary had said, explaining that you can't draw meaningful conclusions from data about that chaotic time period.

Apparently business has gotten so terrible and horrible since, these big homebuilders think offering forecasts is a useless undertaking.

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