Homebuilder valuations

Discussion in 'Stocks' started by scriabinop23, Aug 5, 2007.

  1. Yes I must be crazy, right? I haven't started buying, but am thinking about it soon.

    HOV at 1/3rd of book value.
    KBH at 20% under book value.
    BZH at 1/4th book value.


    http://www.sec.gov/Archives/edgar/data/915840/000114420407039764/v082739_sc13g.htm
    http://www.sec.gov/Archives/edgar/data/795266/000095012407003624/v31777e10vq.htm
    http://www.sec.gov/Archives/edgar/data/357294/000035729407000019/f10q043007clean3.htm

    Look at their balance sheets. They all look the same - they tend to be carrying 2-3 bil in long term debt at about 7% interest. I haven't checked the rates on the debt, but I would assume since it is collaterizable against assets, they can raise money at attractive rates (yes, even in this environment).

    Remember that the homebuilders even now have a 'profit margin' on what they sell. Even if they sell at breakeven (which is already 30-40% below current resale prices), they are able to reduce their debt obligations easily.

    I'm just not seeing why their valuations deserve to be down here (especially HOV, BZH) other than a massive short piling thats occurring right now.

    As opposed to the subprime and even second tier lenders, in which revenues are directly derived from income by volume of business that exclusively depends on low risk spreads on their product, these homebuilders actually have assets and are actually -not- overlevered.

    Anyone have ideas on how to play this?

    As far as negative forces besides a lousy home building business, I am thinking workdowns of inventories over the next yr or so are going to drive down book values, on the other hand ...

    I am thinking the key for HB survival and valuation here is inventory value to debt ratio, since anyone realistic that this 'bottoming' will take a few more years (just as in the previous cycle) can easily count operating profits out for the next 3 years. ie if a HOV has 4.5 bil of inventories and 2 bil of debt, then there's a unrecognized valuation of 2.5 bil (or 1.5 lets say after debt carry costs) total. Lets be conservative and say they sell inventories at a 33% discount to 'present value' - (remember homebuilders sell at an aggressive discount to new family homes already), so 3 bil here.

    3 bil - 2 bil debt = 1 bil.

    62m shares / 1 bil

    For HOV, thats a cash value of $16/share. If they sell inventories at determined present value, thats $32/share. That doesn't include future value of homebuilding profit capacity after this cycle is over.


    The only way HOV is worth what it is now is if its inventories are worth 50% of their estimated value ...

    Anyone have good ideas with analysis capabilities ???

    If they wash out another few points, I think I'll load up. But I think here loading will be with LEAPs. This is a long term trade - but with #s like this, I wouldn't be surprised if some buyouts brought the sector up to realistic levels.
     
  2. Brandonf

    Brandonf ET Sponsor

    Keep im mind that the homebuilders have always been cheap, so the fact that they are cheaper now should not shock anyone. On a price to earnings basis I can not recall seeing any of them come close to matching the avg S&P500 P/E even during the peak of their moves up, in fact I can not off the top of my head recall any of them trading over 10.
     
  3. You're right .. they get a historic multiple around 5-7 because they are so cyclical.

    Look at this earnings history on HOV:

    http://www.earnings.com/company.asp?client=cb&ticker=hov

    In 2000 they were earning a buck a share, and 2005 they were at $10. Now we're at -$2.00. Since they leveraged to grow in between 2000 and 2007 obviously, what realistically will they be earning in the next profitable cycle? Midpoint of $5.00 sounds reasonable?

    Is this fundamentally the same company it was in the mid to late 90s with a share price of $3? Or did their giant increase of cash position facilitate them to have a lower price base going forward?

    At 5 multiple thats a $25 price target, and 10 multiple $50 price target.
     
  4. PJT

    PJT

    "It wasn't supposed to happen like this. Today's home builders were thought to be better-capitalized, savvier and more geographically diverse than many of their predecessors in the last downturn, in the early 1990s. While many are expected to weather the slump, concern is mounting about the balance sheets of a growing number of companies".



    http://online.wsj.com/article/SB118618271832887837.html
     
  5. Homebuilders were cheap because the smart $ knows it a house of cards.
     
  6. silk

    silk

    I like BZH, HOV, and MTH.

    Consider this. BZH was $19 stock 5 1/2 years ago. Since then they made $1.2 billion after tax. Now the stock is $11.30 but the company has assets-liabilities which is $1.2 billion higher. Even factoring in for bad housing market for 24 months and many more writeoffs, a price under $19 can not be rationalized easily. This is why hedge funds are doubling down.

    MTH is good because even if you write down 100% of its land options to zero, the tangible book value is still $28. This would leave MTH with only 1 years supply of land which is virtually nothing for a major builder. So basiclaly this can be viewed as a homebuilder startup with $28 capital trading at $17. This is a great time to be investing in land over the next 24 months and will be alot of opportuinities to pick up land at favorable prices.

    HOV also dirt cheap relative to LEN/DHI/CTX/RYL.

    But current valuations not too surprising considering complete mortgage crises. 1 fed cut and these stocks will trade at 70% of book value instead of 50% of book value which is a 40% share price increase!!

    I could see BZH settleing $20, HOV $17 and MTH $24 assuming market ever believes some sort of bottom/plateau in housing/mortgage markets is hit. Maybe into end of year?

    2 months ago BZH hit $37, HOV $27, and MTH $30. WOW.
     
  7. good article. and the ending is the most important part. It makes a point that most of the cash cushion these companies have sought out are in the form of unsecured credit lines from banks. Lets all assume this will disappear as a source of cash. It makes sense, considering whats going on in the credit markets.

    But these homebuilders have assets to collateralize, so they can raise senior loans on the market at attractively low enough yields. I don't think survival will be an issue.

    All good points here.
     
  8. Homebuilders are boom and bust. They keep building homes until they go bankrupt. Wait until a few big public homebuilders go bankrupt before you try to catch the knife.
     
  9. Problem is that their book values are dubious at best. For instance KB homes show $5 Billion in inventories. For them to liquidate that inventory within 90 days they would have to cut prices by at least half.

    Note how the mortgage payables are about equal to the realizable value of their inventories.

    Wait until a few big builders go under and buy the ones that appear to remain intact.

    John
     
  10. silk

    silk

    I hear that alot, but i have looked at all the numbers and none of the builders are going under for years to come.

    Take BZH for example. they have nothing drawn on their line of credit and they don't have a bond coming due until 2011 with majority coming due in 2014-2016.

    All the builders refinanced at very low rates in 2004 and 2005 and are not burning cash as they downsize their operations.

    Will take a hard 3'rd leg down in housing which might happen but not really on the radar yet. If it happens their will be companies in every industry going under.
     
    #10     Aug 5, 2007