U.S. Markets close in 4 hrs 2 mins

Why Standard Pacific Homes has industry-leading operating margins

Brent Nyitray, CFA, MBA

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

(Continued from Part 4)

Standard Pacific reports third quarter 2014 earnings per share

Standard Pacific (SPF) reported net income of $56.5 million, or 14 cents per share, for the second quarter of 2014. Net income increased 49% from $146 million, or 11 cents per share, in the second quarter of 2013. Wall Street estimates were 12.7 cents a share, so the number was a sizable beat.

Gross margins and selling, general, and administrative expenses improve

Selling, general and administrative expenses decreased 127 basis points on a sequential basis and 91 basis points on a year-over-year basis. Between good cost control and strong gross margins, Standard Pacific has industry-leading operating margins.

Most builders are reporting extremely high gross margins, including Lennar (LEN), PulteGroup (PHM), D.R. Horton (DHI), and Toll Brothers (TOL).

Size and scale matter

Big builders like PulteGroup, Standard Pacific, Lennar, and Toll Brothers have an advantage over the smaller builders. They’re able to access the capital markets and raise funds very cheaply. Smaller builders are finding themselves almost shut out of the capital markets. This gives the bigger builders a tremendous advantage. The big institutional investors are almost throwing money at these bigger builders, while the smaller guys can’t take advantage of opportunities due to tight credit conditions.

This climate is obviously a recipe for mergers and acquisitions activity. The smaller builders will be driven into the arms of the bigger builders. Also, some of the larger builders may believe merging makes sense. Standard Pacific recently bought a small builder out of Austin.

In fact, we’ve already seen some deals. We saw a wave of mergers in the late 1990s in this sector as it recovered from the mini bust of the late 1980s and early 1990s. We could certainly be in a situation where we see another wave of M&A, especially if the hot markets change from the West Coast to somewhere else that a builder wants exposure to. The easiest way to gain that exposure is to buy a stock.

Browse this series on Market Realist: