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11 diciembre 2006

Time to Buy 'Horrible' Homebuilders

Analyst Steven Kim at Citigroup points to six key positives for the group:

  • Consolidation: The top 10 builders still only have a 15% share of the U.S. market, which means that the potential for mergers should keep a bid under the sector.
  • No foreign competition: There are no low-cost rivals who can leverage cheap foreign labor to force price deflation. There's no Toyota (TM) of homebuilding.
  • Big-box retailers: Stores like Home Depot (HD) have driven down the cost of building materials and lowered the expense of ownership, improving home values.
  • No pension liabilities: Builders subcontract out most of their labor, so they're not afflicted by the health and retirement benefit woes of other major industries.
  • Cash business: For the most part, builders receive cash from the mortgage lender right away after a transaction is complete. They don't finance their customers.
  • Clean financials: Restructuring and other special accounting charges are uncommon in this industry, streamlining their balance sheets.
Valuations of homebuilders tend to hold their ground at around one times book value. That is basically their liquidation value, since most of their assets are land or structures under construction. Kim notes that builders reached that valuation on seven occasions over the past two decades and on average have rallied 71% over the next year.

Citigroup's analysis suggests that only 10% of builders' land investments were negotiated in 2005 or later, at the peak of the cycle, and thus potentially at risk of write-offs.

Ranking the Homebuilders
StockScouter rating Price/Book ratio P/E ratio P/E: 5-year high P/E: 5-year low Market cap Recent price
Brookfield Homes 9 3 4.7 19.7 3.3 $958 million $39.70
Avatar Holdings 9 1.5 7.2 95.6 9 $576 million $72.05
M/I Homes 8 0.8 5.9 11.1 4.5 $524 million $38.10
KB Home 7 1.6 4.9 22.1 4.1 $4.6 billion $52.57
D.R. Horton 7 1.3 6.8 13.6 4.3 $8.2 billion $26.79
Technical Olympic USA 4 0.6 5 14.8 2.2 $560 million $9.38
WCI Communities 5 0.7 6.6 13.4 3.1 $787 million $19.30
Orleans Homebuilders 5 0.9 4.4 18.1 3.3 $255 million $14.02
Standard Pacific 5 0.9 4.7 13.6 3.3 $1.6 billion $26.99
Tarragon 6 1.1 18.5 815.3 5.9 $321 million $11.65
Hovnanian Enterprises 5 1.2 5.6 19 3.5 $2.2 billion $37.39
M.D.C. Holdings 3 1.2 6.2 13.6 3.7 $2.5 billion $56.73
Meritage Homes 5 1.3 4.2 18.5 4 $1.2 billion $49.47
Pulte Homes 3 1.3 7.1 13.3 4.9 $8.5 billion $34.10
Centex 5 1.3 7.8 13.8 4.9 $6.6 billion $56.91
Lennar 4 1.4 6.2 14 4.9 $8.2 billion $53.62
Toll Brothers 5 1.5 6.5 22.6 4.8 $4.9 billion $32.96
Ryland Group 6 1.6 5.7 13.9 4 $2.3 billion $54.06
NVR 4 3.3 6.4 15.9 4.8 $3.5 billion $650.93
Amrep 6 4.5 16 26.3 9.2 $584 million $99.88
Beazer Homes 5 -- 5.1 13.5 4.4 $1.7 billion $46.48