Standard Pacific Corp.'s outlook forecasted to be gloomy
As lackluster economic data surrounding housing continues to roll out, the homebuilders industry group continues to take a battering and Standard Pacific Corp. (NYSE: SPF) is no exception.
UBS initiated a “sell” rating late Monday on the constructor and seller of single-family attached and detached homes, citing greater risk perceived in comparison to its peer group.
UBS analyst David Goldberg gave the small-cap three strikes. The analyst said he believes that Standard Pacific will incur higher land-related charges as a percentage of tangible book value in comparison with peers who have older land positions, as the homebuilder has expanded geographically over the past ten years.
“[Standard Pacific has] significant entry-level and first move-up exposure outside California ... and we expect liquidity constraints for these segments to be more severe in the future,” Goldberg wrote in a research note. Excluding California, the analyst said he estimates that approximately 50% of Standard Pacific’s sales were to entry-level and first move-up buyers.
Adding insult to injury, according to Goldberg, Standard Pacific has greater leverage than its peers, which in Goldberg’s opinion could drive an increase in advertising expenditures as the firm attempts to generate greater sales and free cash flow.
UBS maintains a pessimistic outlook on the macroeconomic environment, as the investment bank cited rising supply levels and reduced demand. Today the National Association of Realtors reported that total existing-home sales fell 4.3% to a seasonally adjusted annual rate of 5.50 million units in August. Economists had projected a more modest decline to 5.55 million from a level of 5.75 million in July.
Three strikes coupled with a continued gloomy macroeconomic outlook for the sector could lead investors to think that shares of Standard Pacific may just be out. However, while there are legitimate risks that Goldberg cited, there are a couple of mitigating factors. Goldberg says the company’s decentralized operating structure allows for greater flexibility, as more control is put in the hands of local management and renders such management more adept to responding to changes in the market. Additionally, Goldberg noted that the firm’s experience in improvement projects allows Standard Pacific access “unique opportunities.”
Shares of Standard Pacific (SPF) fell $0.74, or 10.50%, to $6.31 in midday trading Tuesday.
