Waiting for the market bottom

From the Star Telegram:

Horton reins in, still strong

Business stinks at the country’s biggest home builder, and the CEO says it may get worse next year. So why has D.R. Horton’s stock price climbed 20 percent in the past four weeks?

Because the Fort Worth company is being as aggressive about reining in its business as it once was about growing it.

Best example: Housing starts nationwide declined 17 percent in the three months ended in September, as builders responded to slumping demand. At Horton, the company cut its starts 46 percent over the same period.

“I’d say we’re in the early stages of a declining market,” Chief Executive Don Tomnitz told analysts in a conference call Nov. 14. “And as I said [before], most of these downturns are longer and deeper than we envisioned at the beginning.”
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Horton has never posted quarterly results like this: Home sales fell 51 percent in Florida, 39 percent in California, 38 percent in Colorado and 29 percent in Nevada. Sales in the company’s two other major states, Texas and Arizona, were also down by double digits.

The company reported that 4 of 10 customers walked away from their contracts, a cancellation rate that’s more than twice the historical norm. And it took a $199 million charge for write-downs on land and land options
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The housing bubble has been deflating for about nine months, and Horton has held up better than its major competitors. In the fiscal year ended in September, it sold more than 50,000 homes and earned more than $1 billion for the second consecutive year.

The company isn’t giving any guidance on earnings, sales or other details, in large part because it’s puzzled by the high cancellation rate. When an analyst asked whether the company might lose money next year, Tomnitz says he doesn’t see any prospects for that.

But if cancellations continue at their current level, “then it’s going to be a much more difficult market than I’d want to spin,” Tomnitz told the analyst.
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Tomnitz outlined a spate of recent moves to respond to the current marketplace. In the past three months, the company has cut more than $200 million in overhead, including the jobs of three chief operating officers. It has renegotiated better terms on almost all contracts with vendors and labor.
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Although Tomnitz wasn’t specific about future results, he said he expects 2008 sales to be better than ’07’s, and he offered a “perfect scenario.”
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Like everyone else, they’re waiting for the market bottom.