Dow Jones News Service – TALES OF THE TAPE: Standard Pacific Pulled Back From Brink
By Dawn Wotapka, August 14, 2009

NEW YORK (Dow Jones)–It took an industry outsider to bring Standard Pacific Corp. (SPF) back from the brink and turn it into one of the year’s best-performing builder stocks.

After distressed-debt buyout firm MatlinPatterson Global Advisers LLC said last year it would invest more than $500 million in Standard Pacific, Matlin partner Kenneth L. Campbell stepped in as chief executive.

Campbell, who spent more than two decades in restructuring roles at troubled companies, is employing a simple operating strategy in this quest for profitability: aggressively write down the value of land and other assets, cut costs to boost cash and stick with an emphasis on building for people moving from a starter home to a more expensive home.

While it remains in the red – Irvine, Calif.-based Standard Pacific recently reported its 11th consecutive quarterly loss – it says it is close to breaking even. Still “break even is not what we’re trying to get to,” said Campbell, known for his frankness and humor, in the most recent earnings call. “But it beats losing $1.2 billion, or whatever it is we lost last year.”

To be sure, it’s a nascent turnaround that could quickly end should recent signs of housing stability prove fleeting. Still, the stock price has more than doubled this year, delivering a roughly 80% return in the last three months. It recently traded near $3.75 a share, up from its 52-week low of 65 cents in March. Compare that with the Dow Jones US Home Construction Index, up more than 27% since January and some 25% in the last three months.

Industry watchers praise Campbell’s performance since he assumed the top spot in December. “So far, so good,” said Standard & Poor’s Equity Research analyst Kenneth Leon, who predicts the builder will break even in late 2010. “They’re more focused and they’re not trying to be all things to all markets at this point. It was really unclear where they were going as a company before.”

Like most builders, Standard Pacific got caught up in the housing frenzy – entering Las Vegas in 2005 – overpaying for dirt and overbuilding, only to see the market sour.

Since 2006, the top 13 public builders have written-down assets by $33.2 billion, eroding shareholder equity. Standard Pacific, S&P says, has been aggressive, contributing $2.6 billion to that total – more than seven larger builders including Hovnanian Enterprises Inc. (HOV) and Toll Brothers Inc. (TOL). This quarter’s charges were a modest $21.3 million.

While some view that as a sign that charges could be winding down and land is closer to market value, the majority of its lots remain in the nation’s biggest bubble-to-bust states: California, Florida and Arizona. Land-related charges could continue if those states weaken, Leon warned.

The builder has also cut costs by whittling the head count by a third this year and shaving the cost to build each home by thousands of dollars. Selling, general and administrative expenses fell by 42% from last year.

That, combined with unloading excess speculative inventory, helped it end the second quarter with about $575 million in cash – even after reducing debt by $211 million since December.

While several of its peers are constructing smaller and cheaper homes to compete with foreclosures and appeal to first-time buyers, Standard Pacific is targeting those trading up from first-time homes. Its average closing price is one of the sector’s highest, commanding a double-digit premium over foreclosures.

“The recovery may come later, but there are going to be buyers at the higher price point and there are going to be less competitors, particularly with the demise of so many private builders,” Campbell said in an interview.

It’s “a sweet spot that most people aren’t addressing,” said UBS analyst David Goldberg. “There’s this underserved market.”