With five years of continuing decline, it is easy to get caught up in the negative, so let’s focus on the positive for a minute.
Question: In what industry can companies withstand an 80% decline in orders (see chart below) and a 35% decline in price per unit?
Answer: Home building. Thirteen publicly traded home builders, and many private builders, have managed to avoid bankruptcy thanks to making very tough decisions, sticking to disciplines, and managing their balance sheets.
Yes, there are many challenges today, and all of them have been covered ad nauseam in the press. Positive press apparently doesn’t sell newspapers or generate web traffic. While the headlines continue to focus on the builders who are struggling the most, the headlines should really be focused on those who are doing better. Overall, the industry is very close to breaking even, and has more than enough cash to meet debt maturities in the next few years. Here are the net income trends for the publicly traded builders.
The home building industry has traditionally celebrated cutting edge architecture and fantastic salespeople. The land acquisition individuals have traditionally received the biggest bonuses and risen to the top of the organization. However, it is now time to celebrate the CFOs who have kept their companies alive. Clearly, balance sheets aren’t as exciting as beautiful architecture or tremendous revenue growth, but balance sheet management is what has saved these companies. Additionally, while the contractual terms in JV and lender agreements are the bane of existence for many land junkies, the CFOs who carefully structured these terms to protect their firms in case of a downturn have saved their companies hundreds of millions of dollars.
There are always plenty of lessons learned in a downturn. Let’s make sure we remember that strong CFOs are worth their weight in gold!
