What to Expect From Standard Pacific's Q1

Includes: CAA, DHI, HOV, KBH, LEN
by: Kehong Wen

The stock price of Standard Pacific (SPF) has done very well this year. With a market cap below $600 M it remains a micro-cap, but it is one of the most remarkable turn-around stories in this battered sector. Its balance sheet has been rebuilt, with a manageable debt level, its cash flow has been consistently positive over the last year and it has been expanding aggressively in the Carolinas and California.

The company is scheduled to release Q1 earnings next Monday, which should give us more color on where the housing market may be headed, especially in California where Standard has a dominating exposure. The report will naturally affect stocks of other builders that have a sizeable exposure in California and Texas, such as KB Home (NYSE:KBH), Lennar (NYSE:LEN), Hovnanian (NYSE:HOV), DR Horton (NYSE:DHI), etc.

For Q1, analysts are expecting a $0.06/share loss, which is about -$6 M in net income, on revenue of $184 M. The revenue estimate is very likely an underestimate.

According to MDA DataQuick:

An estimated 37,295 new and resale houses and condos were sold statewide last month. That was up 32.7% from 28,111 in February, and up 3.0% from 36,215 in March 2009...

The median price paid for a home last month was $255,000, up 2.4% from $249,000 in February, and up 14.3% from $223,000 in March a year ago. The year-over-year increase was the fifth in a row, following 27 months of year-over-year declines...

Of the homes that resold last month, 40.5% were properties that had been foreclosed on during the past year. That was down from 44.3% in February and down from 56.7% in March a year ago.

In the March quarter of 2009, Standard recorded $209 M in revenue. Given the increases in both sales and prices year-over-year in one of the major markets where Standard operates, and the fact that the company has been ramping up in California, we think it's likely that the revenue will increase rather than decrease substantially.

Newer communities, which may account for more than 10% of the company's total sales, should contribute higher margins. Compensation cost is expected to come down a bit. It is likely that the company will report a small profit excluding tax benefit this quarter. That would be a welcome change.

While increased sales is certainly a welcome change, investors should look for increases in community counts and backlogs as the company headed for the Spring selling season. We will also be looking at the company's use of capital in new land acquisition, and the geographic distribution of its communities. How it positions itself to benefit from a rocky recovery is at least as important as how the last quarter turns out.

Investors have bid up SPF this week, from low $5 to over $6, and then back down to mid $5. This is a very volatile stock. The share price can go up or down 20% easily around earnings releases. Hopefully a clearer outlook and a higher market cap will help lower the volatility.

Disclosure: Long SPF, LEN