The housing market is on the upswing; just look at homebuilders that have reported second-quarter earnings lately. Except for maybe CalAtlantic's (NYSE: CAA). The company's net income decline compared to the year prior stands out among its peers, which posted improving results. Based on the other important home-building metrics, though, this may just be a short-term aberration rather than a lingering concern.
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Let's have a look at CalAtlantic's most recent earnings report, why its decline may not be as severe as it seems, and where the company can go from here.
By the numbers
|Metric||Q2 2017||Q1 2017||Q2 2016|
|Revenue||$1.62 billion||$1.34 billion||$1.56 billion|
|Net income||$98.5 million||$82.3 million||$112.5 million|
Compared to its peers, it would appear that the company is struggling to keep up with the pack. Within the past couple weeks, PulteGroup, NVR, and D.R. Horton have all posted large year-over-year adjusted net income gains. This may just be a one-quarter blip, though, because results for the first half of the year are still ahead of last year's numbers. Considering that home sales are large and less frequent purchases, a little lumpiness in quarterly results can be forgiven.
Aside from the bottom-line slip, there were several good signs in this earnings report. New orders and the average selling price on those new orders continues to rise. As it stands, the company generated 4,078 net new orders in the quarter at an average sales price of $460,000. This drive total backlog to 7,534 comes with a total dollar value of $3.56 billion.
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The one stain on those results is the cost control. Selling, general, and administrative expenses for the quarter came in at 10.7% of revenue. That's only a slight uptick, but it also puts the company at the higher range of its peers on costs. Management said in its press release that these costs were higher than usual because of higher co-broker commissions. The company did expand into the Seattle and Salt Lake City markets in the quarter, so some higher expenses as a percentage of revenue can be expected.
As has been the case with other home builders lately, CalAtlantic's order and value growth was driven primarily by its Southeast region. Every company that has reported thus far has described the Southeast as the fastest-growing market, most notably in the states of Florida and Tennessee. While CalAtlantic doesn't currently have a presence in Tennessee, it does have a substantial portfolio in Florida.
In the second quarter, management bought back 4.4 million shares for approximately $150 million. It still has $217 million available under its most recent share repurchase authorization.
What management had to say
Here are CEO Larry Nicholson's comments on the current outlook for the housing market and what CalAtlantic's capital allocation priorities are right now:
The fundamentals for housing are good, consumer confidence, household formations, job and income growth, solid resale activity in the tight resale supply and a tight supply of home sites in the prime locations we target, continued to fuel our expectations of top-line and bottom-line growth. With that backdrop, our capital allocation priorities remain intact. Our first priority is land and delivering profitable growth.
We will continue to focus on growth plans, both organically and via acquisition. Our second priority is to return capital to our shareholders as evidenced by the $150 million of opportunistic share repurchase we completed during the quarter.
What a Fool believes
CalAtlantic's earnings were OK, but they didn't keep pace with its peers as most posted near double-digit adjusted earnings growth. If CalAtlantic wants to achieve the double-digit top- and bottom-line growth that management says it wants to, it is going to have to step it up. Entering into the Seattle and Salt Lake City markets could be a path to that growth. Seattle is the nation's fastest-growing big city, and the Salt Lake City area has some of the hottest property markets in the U.S. today. If CalAtlantic can post big growth numbers from these regions in the coming quarters, then its ambitious growth goal could be within reach.
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