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A growing top line: Standard Pacific Homes' 2Q14 earnings

Part 3
A growing top line: Standard Pacific Homes' 2Q14 earnings (Part 3 of 5)

Why Standard Pacific Homes’ gross margins keep increasing

Standard Pacific’s characterization of the current market state

Standard Pacific (SPF) CEO Scott Stowell characterized the housing market’s current state this way: “We have experienced and continue to manage through the largest boom/bust housing cycle in U.S history. We have made significant progress to-date. I believe the housing market is less volatile than perceptions about the housing market. While the housing data remains mixed, the economic and demographic fundamentals remain strong and they will eventually prevail. The housing recovery is slow, uneven, but it is real (emphasis mine). We’re still maintaining our cautious to positive outlook. I believe we remain well positioned to take advantage of the long-term housing recovery.”

SPF gross marginsEnlarge Graph

As builders like Toll Brothers (TOL) have seen, the luxury buyer is doing extremely well these days as asset prices soar. The first-time homebuyer, on the other hand, is competing with professional investors, is often shut out of the job market, has a high level of student loan debt, and has difficulty getting a mortgage. As a result, Standard Pacific chose early on in the housing bust to focus on the move-up homebuyer.

Gross margins increase

Company-wide gross margins increased sequentially to 26.7% in the second quarter from 25.9% in the first quarter of 2014 and 23.9% in the second quarter of 2014. Gross margins vary across geographies. So the company’s gross margins going forward will depend on which geographies are dominating. Some allow for stronger pricing, while others require more discounting.

Home price appreciation is moderating. Costs are rising. Incentives are coming back to normal levels. Other builders—like PulteGroup (PHM), Lennar (LEN), KB Home (KBH), and Toll Brothers (TOL)—have reported increasing gross margins.

Going forward, it will probably be difficult for the builders to continue to raise prices—especially in the absence of wage inflation. Ultimately, home prices are linked with wages. Once they hit the ceiling, then they’ll have to increase volume to move the top line. This will be a recipe for decreasing gross margins going forward.

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