Will Standard Pacific Pacify?

Investors have bid up Standard Pacific Homes (SPF) ahead of its Q1 earnings release next Monday (4/19). Since the company has a very large exposure in California, this is likely due to the March sales data just reported by MDA DataQuick. SoCal's sales volume has gone up 5% over the same period last year, and the median price has been up by 14%.

According to the same source, similar trend but smaller magnitude has been observed for January and February Southland home sales.

For Q1, analysts are expecting a $0.06/share loss, which is about -$6 M in net income, on revenue of $184 M.

The revenue estimate is very likely an underestimate.

In the March quarter of 2009, Standard recorded $209 M in revenue. Given the increases in both sales and prices year-over-year in one of the major markets where Standard operates, and the fact that the company has been ramping up in California, we think it's likely that the revenue will increase, rather than decrease substantially.

Newer communities, which may account for more than 10% of the company's total sales, should contribute higher margins. Compensation cost is expected to come down a bit. It is likely that the company will report a small profit excluding tax benefit this quarter.

While increased sales is certainly a big welcome, investors should look for increases in community counts and backlogs as the company heads for the Spring selling season. We will also be looking at the company's use of capital in new land acquisition, and the geographic distribution of its communities. How it positions itself to benefit from a rocky recovery is at least as important as how the last quarter turns out.

This is a very volatile stock. The share price can go up or down 20% easily around earnings release. Should the stock price continue to rise in the next few days, the stage may be set for a big selloff after earnings. If that doesn't happen, we may see a more pacific trading next week.