The Bear Case on Centex Still Appears Compelling

In a previous post we wrote of our short of Centex (CTX) in Insight’s model portfolio.

We continue to believe that Centex has at least 10-15% downside from current levels. Based on the company’s shrinking operating earnings per unit, we can easily make a case for operating earnings in the $5.50 per share range for Centex’s 2007 year, even with the company’s stock buybacks. This estimate is well below the company’s guidance of $7.00 per share.

As reported in its 8K, the company’s buybacks in the last quarter were at average prices well above its current stock price. Thus, those buybacks were not value enhancing to shareholders. It should also be remembered that buybacks serve to increase leverage, and make the company riskier, as bondholders are well aware.

An LBO of Centex is a possibility, but we don’t see the case for it. If we were an acquirer we would be hesitant to buy a homebuilder in this environment, given their risky cash flows. We project that if operating earnings per unit continued to fall at the rate they did in the just completed quarter, Centex’s eps would be well below $5.50 per share.

Even if we were determined to buy, why not wait for the stock to trade down to below book value where it has traded before? Centex’s leverage acts as another disincentive for a prospective buyer.

We reiterate our view that Centex has 10-15% downside from here.

CTX 1-yr chart:

The views of Philip Frank, PhD of Insight Asset Management LLC are based on information Insight Asset Management LLC believes to be, but can not guarantee to be, accurate. Our views are not intended to be a forecast or guarantee of future events, or investment advice. There can be no assurance that securities we mention will remain in our investment portfolios