Beazer Homes USA, Inc. (NYSE: BZH) Cut to Underperform at Credit Suisse.
BHP Billiton Limited (NYSE: BHP) Started as Buy at Goldman Sachs.
Carnival Corporation (NYSE: CCL) Cut to Neutral at JPMorgan.
FedEx Corporation (NYSE: FDX) Cut to Hold at Jefferies.
General Growth Properties (NYSE: GGP) Raised to Buy at Stifel Nicolaus.
Intel Corporation (NASDAQ: INTC) Cut to Neutral at JPMorgan.
Linear Technology Corporation (NASDAQ: LLTC) Cut to Underweight at JPMorgan.
Logitech International SA (NASDAQ: LOGI) Cut to Underweight at JPMorgan.
Meritage Homes Corporation (NYSE: MTH) Cut to Underperform at Credit Suisse.
Panera Bread Co. (NASDAQ: PNRA) Raised to Overweight at Morgan Stanley.
Potash Corp. of Saskatchewan (NYSE: POT) Raised to Sector Outperform at CIBC.
Ryland Group Inc. (NYSE: RYL) Cut to Underperform at Credit Suisse.
Steel Dynamics Inc. (NASDAQ: STLD) Started as Buy at Deutsche Bank.
Stifel Financial Corporation (NYSE: SF) Raised to Buy with $37 target at Goldman Sachs.
Tesla Motors, Inc. (NASDAQ: TSLA) Raised to Buy at Wunderlich.
U.S. Bancorp (NYSE: USB) Cut to Neutral at Citigroup.
Wynn Resorts Ltd. (NASDAQ: WYNN) Raised to Positive at Susquehanna.

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JON C. OGG

According to online foreclosure tracker RealtyTrac, foreclosure filings topped 228,000 in August, a 7% jump over July filings.  One in every 570 US housing units is now in foreclosure. This puts even more pressure on new homebuilders like Toll Brothers Inc. (NYSE: TOL), D.R. Horton Inc. (NYSE: DHI), NVR Inc. (NYSE: NVR), Lennar Corp. (NYSE: LEN), PulteGroup, Inc. (NYSE: PHM), M/I Homes Inc. (NYSE: MHO), Ryland Group, Inc. (NYSE: RYL) and Beazer Homes USA Inc. (NYSE: BZH).

The builders have managed to stay afloat by cutting costs and shedding real estate and a myriad of other financial finagling, but they’re not making money building houses. And the more houses that are foreclosed, the weaker that housing prices get as banks are willing to take just about any reasonable offer to get rid of the foreclosed properties they own.

New default notices in August totaled nearly 79,000, up 33% since July and the largest one-month increase since August 2007. The peak month for notices of default was April 2009, when more than 142,000 notices were filed.

The well-publicized robo-signing issue and other documentation problems are finally being settled and there is plenty of reason to believe that more foreclosures will begin to work their way through the system. Freddie Mac has said that it expects the delay in filing foreclosures to last through the end of this year, but the August report could signal that the move is already on.

Just a month ago ratings on NVR, PulteGroup, M/I Homes, Ryland, D.R. Horton, and Beazer were raised at one research firm from ‘Sector Perform’ to ‘Outperform’. It’s difficult to understand why. What’s not difficult to understand is that the shares in these firms all jumped  by about 20%. Since then most of the companies have given it all back as reality takes over.

Lennar, which reports earnings on Monday, is expected to post EPS of $0.10 on sales of $810.2 million. Last year’s EPS in the same period was $0.16 and revenues totaled $825 million. The stock’s target price is $21.81 and it closed at $13.72 yesterday, an implied upside of nearly 60%. Anyone who believes that probably believes in the tooth fairy.

Paul Ausick

For the quarter, Toll Brothers sold 693 units, down from 803 in the same period a year ago. Contracts increased slightly year-over-year, from 701 in 2010 to 713. Backlog also increased, from 1,636 units in the same period a year ago to 1,780. Toll Brothers builds higher-priced homes and has been somewhat insulated from the turmoil at the lower-priced end of the market. However market volatility in the last few weeks could cause the company some more problems going forward.

Toll Brothers was not among six builders that received ratings upgrades earlier this month. NVR Inc. (NYSE: NVR), PulteGroup, Inc. (NYSE: PHM), M/I Homes, Inc. (NYSE: MHO), Ryland Group, Inc. (NYSE: RYL), D.R. Horton Inc. (NYSE: DHI), and Beazer Homes USA Inc. (NYSE: BZH).

The number of foreclosed homes either on the market or in the line to come onto the market remains very high. There has been a delay in processing foreclosures, and once that delay ends, the number of foreclosed homes is expected to jump again. Pricing pressure on new homes will follow.

The sort-of good news for the homebuilders is that this flow of foreclosures is not expected to hit the market until 2012. That’s some help to the builders for the rest of this year, but not much.

Toll Brothers guided deliveries for the full fiscal year at 2,475-2,675 homes, compared with an earlier estimate of 2,300-2,800. The company’s first estimate for new home sales was 2,100-2,900. In the 2010 fiscal year, Toll Brothers sold 2,642 units, a drop of -11% from 2009.

The market for new houses is weak, and there is really no good reason for optimism. A slow-growth economy combined with high unemployment and an abundance of foreclosed properties don’t forecast a sunny outlook for the homebuilders going into 2012.

Shares of Toll Brothers are up about 0.4% in the pre-market this morning, at $14.80. After posting a new 52-week low yesterday, the stock’s 52-week range is $14.59-$22.42. To indicate the abiding hope for the housing market, Toll Brothers trailing P/E ratio is nearly 41. The SPDR S&P Homebuilders ETF (NYSE: XHB) closed yesterday at $13.49, near the bottom of its 52-week range of $13.05-$19.21.

Paul Ausick

Aetna Inc. (NYSE: AET) Raised to Buy at Jefferies.
AMR Corp. (NYSE: AMR) Raised to Neutral at BofA/ML.
Archer Daniels Midland Company (NYSE: ADM) Started as Equal-Weight at Barclays.
Arcelor Mittal (NYSE: MT) Cut to UNderperform at BNP Paribas.
Bunge Limited (NYSE: BG) STarted as Overweight at Barclays.
Cincinnati Financial Corporation (NASDAQ: CINF) Maintained Underperform as Bear of the Day at Zacks.
Coach Inc. (NYSE: COH) Raised to Buy at Jefferies.
Expedia Inc. (NASDAQ: EXPE) Started as Neutral at Credit Suisse.
Fastenal Company (NASDAQ: FAST) Raised to Outperform as Bull of the Day at Zacks.
Human Genome Sciences Inc. (NASDAQ: HGSI) Started as Buy at Brean Murray.
Insight Enterprises, Inc. (NASDAQ: NSIT) Reiterated Buy as Value at Zacks.
Juniper Networks, Inc. (NYSE: JNPR) Raised to Outperform at Morgan Keegan.
Kimberly-Clark Corporation (NYSE: KMB) Raised to Equal-Weight at Barclays.
Priceline.com Incorporated (NASDAQ: PCLN) Started as Outperform with $720 target at Credit Suisse.
Ryland Group Inc. (NYSE: RYL) Raised to Neutral at Credit Suisse.
US Airways Group, Inc. (NYSE: LCC) Raised to Buy at BofA/ML.
Sanderson Farms, Inc. (NASDAQ: SAFM) Raised to Neutral at JPMorgan.
Walgreen Co. (NYSE: WAG) Cut to Underweight at Barclays.

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JON C. OGG

The Mortgage Bankers Association reported this morning that applications for mortgages rose nearly 22% in the past week.  Refinancings jumped 30%, while purchase applications fell by nearly -1%. The news comes the day after one analyst firm lifted ratings on three builders from ‘Sector Perform’ to ‘Outperform’. The three were NVR Inc.(NYSE: NVR), PulteGroup, Inc. (NYSE: PHM), and M/I Homes, Inc. (NYSE: MHO). Three other builders received similar upgrades on Monday: Ryland Group, Inc. (NYSE: RYL), D.R. Horton Inc. (NYSE: DHI), and Beazer Homes USA Inc. (NYSE: BZH).

The lone winner, not the ‘loan winner,’ may be Stewart Information Services Corp. (NYSE: STC).  All that matters for them is volume rather than if it is a refinance or a purchase.

Beazer reported its third-fiscal quarter earnings yesterday and badly missed already low expectations. The company reported an EPS loss of -$0.80, compared with an expectation of an EPS loss of -$0.42. Revenue of $172.8 million missed expectations of $232 million. Shares posted a new 52-week low of $1.69, and closed at $1.83. Ryland posted a new yearly low yesterday as did all the others we’ve noted.

A big part of the problem the builders face is the number of existing homes available for sale and the number of bank-owned homes, called REOs for “real-estate owned”, also on the market. In June a record number of REOs were sold and the inventory of REOs fell significantly. That should be good news for builders.

Alas, the good news must be tempered with the knowledge that 90-day delinquent loans and loans in foreclosure have been getting processed more slowly. Foreclosure proceedings have been delayed by process issues, changes in state foreclosure laws, and court rulings that have to be applied to existing foreclosures.

Freddie Mac expects the delays in foreclosures to continue through the rest of 2011. As a result, REO inventory is very likely to continue to decline, giving a false picture of the true level of delinquent and foreclosed properties. As that inventory falls, the instinctive response is that new building will increase.

While that may happen, far likelier is that the bottleneck on foreclosures will finally open and the REO inventory will jump again. New home building will come under pressure again as builders are forced to compete with foreclosed properties now up for sale at distressed prices.

With the S&P down by nearly -3% this morning, Beazer and PulteGroup are down more than twice that amount. Beazer shares have posted another new low today, at $1.68. The SPDR S&P Homebuilders ETF (NYSE: XHB) is down about -3.5%, at $13.64, just inside the 52-week range of $13.15-$19.21.

Paul Ausick

AFLAC Inc. (NYSE: AFL) Reiterated Buy and $83 target at BofA/ML.
Capella Education Co. (NASDAQ: CPLA) maintained Underperform and as Bear of the Day at Zacks Investment Research.
The Cooper Companies (NYSE: COO) Reiterated Outperform as Bull of the Day at Zacks Investment Research.
Hartford Financial Services Group Inc. (NYSE: HIG) Reiterated Buy at Argus.
International Business Machines Corp. (NYSE: IBM) Reiterated Buy at Argus.
International Flavors & Fragrances Inc. (NYSE: IFF) Reiterated Outperform and $70 target at Credit Suisse.
Las Vegas Sands Corp. (NYSE: LVS) Cut to Hold at Argus.
MetLife, Inc. (NYSE: MET) Reiterated Buy and $54 target at Argus.
Nucor Corporation (NYSE: NUE) Cut to Sell at S&P Equity Research (late-Tuesday call).
Paychex Inc. (NASDAQ: PAYX) Raised to Hold at S&P Equity Research (late-Tuesday call).
Universal Health Services, Inc. (NYSE: UHS) Reiterated Buy with $55 target at BofA/ML.

In a sector call, BofA/ML is raising estimates on earnings and orders for the first half of 2011 in DR Horton Inc. (NYSE: DHI), KB Home (NYSE: KBH), Lennar Corp. (NYSE: LEN), and Ryland Group Inc. (NYSE: RYL).  The firm maintained Buy ratings on each based on strong entry level buyers being active in the Spring.

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JON C. OGG

Like KB Home (NYSE: KBH), which reported earnings last week, Lennar skipped over a very low bar. Not much is expected of other builders reporting later this month and next. Ryland Group Inc. (NYSE: RYL) reports earnings on January 26th and is expected to post an EPS loss of -$0.35 on revenue of $232.3 million. DH Horton Inc. (NYSE: DHI) reports on January 31st and analysts are estimating an EPS loss of -$0.03 on revenue of $796.1 million. PulteGroup Inc. (NYSE: PHM) reports on February 1st, and is expected to post an EPS loss of -$0.09 on revenue of $1.12 billion. Toll Brothers Inc. (NYSE: TOL) reports earnings on February 21st, and is expected to post an EPS loss of -$0.07 on revenue of $319 million.

Lennar noted that its Rialto Investments business contributed $12.4 million in operating earnings for the quarter, mostly from its 49% share in a portfolio of real estate loans it acquired with the help of the FDIC. Operating income from the company’s financial services division totaled $11.7 million. That’s about 62% of the company’s total operating earnings before taxes. For the year, non-building segments contributed $88.6 million of $94.73 million in pre-tax earnings.

As for Lennar’s homebuilding business, new orders dropped -5% and deliveries dropped -12% in the quarter. Average sales price was flat at $238,000, even though buyers’ incentives dropped from 13.2% to 12.4%. Lennar’s backlog fell to 1,604, which had the effect of widening the company’s gross margin from 11.1% to 17.7%.

The Wall Street Journal cites a UBS analyst who believes Lennar is well-positioned to enter 2011 because “its operating acumen, combined with opportunities from Rialto, should allow for profitability even if the broader market declines.”

In other words, Lennar doesn’t have to build and sell houses to make money. KB Home’s quarterly profits came from a significant reduction in the company’s SG&A expenses. People aren’t buying many houses, so the imaginative homebuilders are finding some other way to make profits. It will be interesting to see how the other builders jump over their very low bars.

Lennar shares are up about 5.7%, to $19.97, within the 52-week range of $11.93-$21.79. The other homebuilders are also ticking up on the report from Lennar. The SPDR S&P Homebuilders ETF (NYSE: XHB) is also up more than 1%, to $17.91 in the first hour of trading this morning.

Paul Ausick

Other builders will be reporting results in the next few weeks. Next up is Lennar Corp. (NYSE: LEN), which reports earnings next Monday. Analysts are expecting EPS of $0.02 and revenue of $753.8 million. Ryland Group Inc. (NYSE: RYL) reports earnings on January 26th and is expected to post an EPS loss of -$0.35 on revenue of $232.3 million. DH Horton Inc. (NYSE: DHI) reports earnings on January 31st and analysts are estimating an EPS loss of -$0.03 on revenue of $796.1 million. PulteGroup Inc. (NYSE: PHM) reports earnings on February 1st, and is expected to post an EPS loss of -$0.09 on revenue of $1.12 billion. Toll Brothers Inc. (NYSE: TOL) reports its 2011 second fiscal quarter earnings on February 21st, and is expected to post an EPS loss of -$0.07 on revenue of $319 million.

None of this is very pretty, but the bar has been set so low for the homebuilders that it might be nearly impossible for them to fail to clear it. After all, KB Home did it.

How the company did it is instructive. KB Home’s SG&A expenses for the previous quarter were $78.6 million, compared with just $55.7 million in the fourth quarter. That’s a difference of $22.9 million. The company’s total net income for the quarter $17.4 million. Without the cost cutting, the company would have lost more than $5 million.

As for its actual products, KB Home had a tough quarter. The one bright spot was the company’s average selling price, which rose from $203,400 in the same period a year ago to $232,500. But the company delivered more than 1,100 fewer homes in the quarter than in the same period a year ago. That drop is almost identical with the total drop for the full year, indicating that sales are might be getting worse, not better.

Optimism about for homebuilders’ shares comes from their ability to manage their expenses and make land deals, not from building and selling homes. Analysts don’t expect much from these companies, and any positive movement is hailed as the start of a housing recovery. That may be true next year, but it won’t happen in 2011.

Although mortgage interest rates are still below 5%, few buyers are interested. People are more worried about their jobs and their wages than they are buoyant about mortgage rates. The 2% cut to social security taxes also won’t make any difference in the housing market. For the homebuilders to prosper, US economic growth needs to reach 4%, which would cut the unemployment rate by at least 2%. Even the most optimistic outlook for 2011 doesn’t forecast that kind of growth.

KB Home’s shares are trading up nearly 8%, to $15.42, at market open this morning. The company’s 52-week range is $9.43-$20.13. The other homebuilders are seeing their shares rise too, between 1.5% and 2.5%. The SPDR Homebuilders ETF (NYSE: XHB) is also up about 1.5% this morning, to $17.93, well within its 52-week range of $13.59-$20.00.

Paul Ausick

When Horton’s CEO reported earnings for the company’s fourth fiscal quarter in mid-November, he said, “To be quite candid, I don’t see much on the horizon that would give anybody a great degree of comfort on the financial condition of the country. I just don’t see a lot of hope for a great spring market.”  Does that sound encouraging?

Or does any of this sound encouraging? PulteGroup, Inc. (NYSE: PHM) reported an EPS loss of -$2.63 for its most recent quarter, posting $1 billion in impairment and other charges. Lennar Corp. (NYSE: LEN) reported an EPS gain of $0.06 for its third quarter, but that is expected to fall to just $0.02 in the fourth quarter and to a loss in the first quarter of 2011. KB Home (NYSE: KBH) reported a loss in its third quarter and expects more in the fourth quarter. (NYSE: TOL) posted a loss in its third quarter and only showed a profit in the fourth quarter due to an unexpected tax benefit.

Now there was something approximating good news about October 2010 pending home sales. The National Association of Realtors reported a 10.4% increase in its pending home sales index from September to October. September’s report noted a -1.5% decline from August. But compared with October 2009, this past October was down more than 20%. Those figures are for seasonally adjusted annual rates; the non-adjusted numbers are about 10% worse.

If there is any substantively good news for homebuilders, it’s pretty well hidden. Homebuilders’ shares are all down between -1% and -3% in early trading this morning, and the SPDR S&P Homebuilders ETF (NYSE: XHB) is down a little more than 1%.

Paul Ausick

Apollo Group Inc. (NASDAQ: APOL) still struggles under its new business model that will obviously lower enrollment under a new tighter regulatory environment.  Shares hit yet another 52-week low of $33.80 today versus a high of $66.69.  Currently shares are down 1% at $34.11 in rather light trading volume.

China Education Alliance Inc. (NYSE: CEU) is getting killed this Monday, although this is a China online education and training company.  Shares are down 42% at $2.55, but this hit a low of $2.34 in today’s trading.

Dean Foods Company (NYSE: DF) is still reeling from its woes.    On light trading volume this post-Thanksgiving Monday, shares hit another 52-week low of $7.34 versus a 52-week high of $18.79.  Shares are now down $0.02 at $7.35.  Be advised, this is a decade low.

Trouble is still there for homebuilders with three seen hitting 52-week lows this Monday. M.D.C. Holdings Inc. (NYSE: MDC) hit a low of $24.56 for the last year versus a high of $39.28.  Pultegroup Inc. (NYSE: PHM) is down 0.5% at $6.17, but the low today now gives a 52-week trading range  of $6.13 to $13.91.  Ryland Group Inc. (NYSE: RYL) is down 1.25 at $14.20 in early afternoon trading, but the low today gives a new 52-week trading range of $14.17 to $26.03.    14.28    -0.09    -0.63%    14.63    14.16    448,260

SUPERVALU Inc. (NYSE: SVU) is now fighting its name as investors are deciding if there is anything super or any value.  The slide has continued despite the brief recovery this morning.  While shares are up 0.9% at $8.75, the 52-week range is now $8.67 to $17.89.  Today’s lows go back to 1995 or so.

JON C. OGG