Housing builders

A comprehensive post on housing related stocks. Based on several Guru's buying and the fundamentals showing promise long term. That and I'm even considering buying a house, I'm cheap, therefore houses are at somewhat reasonable levels. Of the multiple housing builders in the industry none readily exist as a stand alone leader. This is a business that offers little to any barrier to entry. Scale seems to help but I would argue due to the desired customization, economies of scale don't have the same effect as say a car manufacturer. The question remains is the bad news all written into the stock?

Companies:


Beazer Homes (BZH): Very leveraged homebuilder. 75% debt to total capital, although debt has been reduced by 38% since 2006 to 1.2billion. All their debt is fixed rate and a majority is due >5 years from now. Total contractual obligations stand at 2.2billion. Ridiculous sell off in credit crisis may have been linked to relationship with Countrywide.

Total numbers of orders have remained steady in past couple of years in low 4000's (4122 in 2010). Unfortunately the average selling price has declined and continues to do so. The company has streamlined operations by getting rid of mortgage and title services.

Concerns include continued deteroiation of housing prices which will impact margins. Margins for BZH though are low and have been low for the past several years due to inventory impairments. Of the 1.27 billion in inventory being held, 51million saw impairment charges. This seems low considering a 33% cancellation rate for the quarter and 25% for the year.

Insider buying by several top officers, continued effort to streamline. Buying by Paulson, Tepper are a few of the major Gurus. CEO was ousted, ridiculous pay package to just ride an economic bubble. Stock has responded (intra-day anyways) negatively. Good riddence IMO. A 10year average FCF value X 15 minus liabilities plus cash gives a market value of ~750 million. Downside does seem adequately protected currently. Piotroski of 6. No position.

D.R. Horton (DHI): As understood by the media DHI was the king of speculative homes. 12% insider ownership and a 1.2% dividend yield make this attractive. A very broad ranged homebuilder (25% of sales originate in S. Central region) building homes ranging from 90-700k with an average selling price of 206k. Cancellations have reduced 2009-2010 from over 30% to 26% respectively. Over 2.1Billion in debt with 6.9% average rate. Least attractive to me in terms of prospects and business. No position.

M.D.C. Holdings (MDC): Highest dividend out of the group 4% as of 6/13. Guru held. Very even sales distribution between West (CA and Nevada), Mountain (Utah, Colorado) and East (Maryland, VA, FL). Standard cancellation rates but a low level of backlog compared to the others, only 269million, realized approximated at 188million given a 27% cancellation rate. Completely integrated homebuilder from start to finish, providing title services, mortgage, building and insurance. Plenty of excess cash as shown by EV<MC.

They decided to invest a large portion of their cash into marketable securities. The interest income off of this alone generates 26million/year. Dividend payout is ~48million/year. Dilution due to stock options are fairly limited until >33/share. I'm not sold that this is a GREAT bargain but it showed great resilience 2008-2009 and the dividend makes it extra tantalizing, currently I believe this to be fairly valued but given further deterioration of the housing market or a drop under 20/share a purchase is justified. Current EV divided by 10 year EBITDA average gives a 4.4 ratio, pretty cheap.  Appears to be well managed and didn't go crazy with speculative excesses. 17% gross margins coupled with -11% net margins make me leary.

NVR: Least speculative housing builder. Very little land ownership. Acquires land through options and then develops as needed. As a result carries a low inventory and has the option to get land at (currently) cheap prices. Flexibility in model is how I see it. Only owned by Einhorn and was bought at significantly cheaper prices. Currently range bound ~ 700/share. 10 year FCF average is 398m. Normal valuation of (FCF*12) less all liabilities plus cash gives a value around 5600million. Todays share price offers a 27% discount to normalized FCF. EV/(10 year EBITDA average) is 4.95, in line with MDC.

Insiders own a lot of shares, low cancellation rates (14% 2010, 23% 2008) and only 85 million in debt compared to 1.2billion in cash. Dangers exist in the concentrated efforts as 37% of home settlements occurred in Washington DC or Baltimore. Under 650/share I'll research more. For now I'll hold off as there has been a bit of a run up in share prices over the past six months.

MAS: Not a home builder but supplies all sorts of fixtures, water faucets and such. Throwing off a 2.4% dividend. Cheap on most reversion to mean metrics. 10 year average FCF of 847million, giving a P/FCF of 5.0. Current EV/(10yr mean EBITDA)= 3.8 and a normalized valuation as denoted above for NVR gives a MC of 4.7billion, implying approximately a 10% MOS. Cheap...yes. Cheap enough?...no. Under 10/share will warrant further deeper research.