US Home Builders

[rijk]

some more good information...

 

regards

rijk

 

http://seekingalpha.com/article/288744-housing-will-rebound-stronger-than-expected?source=feed

[turar]

based on current economic conditions and outlook, it might be wise to pick "the last one standing" any suggestions?

 

Maybe an ETF like ITB or XHB?

[ubuy2wron]

what a difference a month makes, several home builders are now trading below bv and at low single digit p/e (based on pre bubble normalized earnings power)

 

phm p/bv 0.75 p/e 3

len p/bv 0.74 p/e 4

ryl p/bv 0.8 p/e 2

mdc p/bv 0.8 p/e 4

tol p/bv 0.96 p/e 10

dhi p/bv 1.1 p/e 6

 

buffett talks about excess housing inventory of only 1 million and a recovery by mid 2013

 

http://www.charlierose.com/view/interview/11845

 

based on current economic conditions and outlook, it might be wise to pick "the last one standing" any suggestions?

 

regards

rijk

  I purchased TOL leaps two weeks ago at pretty attractive prices/ They will be one of the last guys standing they still have lots of land on books acquired pre 2000 and they have been acquring distressed property and mortgages. The home builders have typicaly bottomed at PB ratios around current levels. I believe SFR is the least risky investment available today. I am in the Buffet camp in thst the over supply is no where near as large as many imagine.

[jay21]

buffett has repeatedly stated that it is only a matter of time for construction to rebound with family formations > 1 million and new starts < 500k

 

since the sector is clearly out of favor, there might be some interesting opportunities here...

 

most home builders that are still around have adjusted their business models to current economic reality and operate at break even levels at a fraction of the peak years activity....

 

an "orientational dive" in the sector yields the following quantitative information, feedback and qualitative comments would be highly appreciated.....

 

the companies are ranked from strong to weak (financial staying power), i used average 2001-2004 earning to estimate earnings power, knowing that this method is far from accurate but represent, i hope, a conservative valuation approach

 

MDC

- very strong equity buffer/staying power, $1 B equity, $1 B debt, $1 B cash

- earnings power $200 M and MC $1.2 B = P/E 6

- Whitman sold in 2010 with significant loss????

- $200 M fully provided DTA

- P/BV= 1.2

 

DHI

- strong equity buffer/staying power with $2.6 B equity, $2 B debt and $1 B cash

- earnings power $500 M and MC $4 B = P/E 8

- $900 k fully provided DTA

- P/BV=1.4

 

RYL

- reasonable equity buffer/staying power $540 M equity, $900 M debt, $600 M cash

- earnings power $200 M and MC $750 M = P/E 3.5!!!!!

- P/BV = 1.4

- $250 M fully provided DTA

 

PHM

- reasonable equity buffer/staying power with equity $2 B, debt $3.4 B and cash $1.4 B

- earnings power of $500 M and MC $3 B = P/E 6

- owns $3 B land, entitled land might get scarce and takes time to develop, looks like a good competitive advantage

- $2 B fully provided DTA

- P/BV= 1.7

 

LEN

- reasonable equity buffer/staying power, $3 B equity, $3 B debt, $1 B cash

- earnings power $600 M and MC $3.5 B = P/E 6

- $1 B fully provided DTA

- P/BV= 1.3

- earnings from Rialto distressed real estate investment fund

 

NVR

- incredible ROA & ROE 2001-2005

- earnings power $350 M and MC $4.4 B = P/E 12

- P/BV=2.4  expensive……

- no losses during housing crisis???

 

BZH

- cheap but no equity buffer/no staying power

 

KBH

- cash $800k, debt $1.8 B, equity $440k

- high leverage, minimal equity buffer in case housing doesn’t recover soon

- very cheap based on earnings power of $300 M and MC $750= P/E 2.5!!!!!!

- too risky……..

 

TOL

- earnings power $250 M and MC $3.5 B = P/E 14, too expensive……

 

 

 

 

Why pay more than book for a commodity business with absolutely no barrier to entry, especially when there are better businesses that might benefit from normalization of construction?  Home builders that survived the late 80's and early 90's real estate recession barely scraped by for many years until prospects improved around Y2K.

 

I have been thinking about home builders for awhile. I couldn't get comfort over the business model and normalizing profits.  However, I thought I saw some of the better builders had distressed property arms that would try to scoop up bargains.  Wouldn't allow them to trade over book?  IDK, if I had a chance to play housing recovery, I would have picked up something like MAS or FBHS. 

 

MAS still seems pretty undervalued compared to normalized housing starts.  Anyone have any other opportunities leveraged towards the housing recovery?

[ItsAValueTrap]

I don't live in the US, but if I did... buying properties at good cap rates might be a good trade.  The financing looks extremely attractive for 30-year fixed rate mortgages.

 

*I am short KBH.  http://glennchan.wordpress.com/2012/09/18/kb-home-kbh-short-thesis/

 

LEN, TOL, and NVR are probably the best managed.

 

I'm not sure if NVR's book value may be deflated since it came out of bankruptcy and there may be assets carried at very low prices.  They have factories where they pre-assemble parts of houses.  I believe that they pre-assemble part of the house in a factory, and then finish the rest of the work on site.  Manufactured housing is cheaper than traditional housing... this may give them a slight cost advantage as they are somewhere in between manufactured housing (which Berkshire does) and traditional housing.

 

Lennar management is pretty smart.  They do some non-residential construction.  There is an arbitrage situation between the A and B shares.

 

Toll Brothers do high-end homes... the homes on their website look really beautiful (unlike KBH).  The CEO brothers were smart enough to sell their stock at the peak.

 

KBH does this custom-home thing, where you can highly customize your home.  This is rather different than the other homebuilders.  The homes on the website look poorly staged in my opinion.  The interior design and color choices are a little weird and out there.  They put too much furniture into the model homes (on the website) so they don't look as spacious (removing clutter really makes a room look bigger).

 

Overall the sector strikes me as richly valued... the homebuilding rebound (if it even happens) is already priced in.  If you personally buy a house with a 30-year fixed rate mortgage, you'll "create" your own housing stock with extremely attractive financing and a good yield (assuming you buy at a good cap rate)... in a theoretical sense that seems far more attractive than the public markets.  Especially in Phoenix Arizona.

[Casey]

https://www.cnbc.com/2020/04/27/coronavirus-homebuilders-see-sales-jump-as-renters-flee-urban-apartments.html

 

Bump.

 

I think a lot of people with high salaries in major cities are looking at houses in smaller cities and suburbs right now like: "Are you serious, I can live there instead of this $3,000/month apartment?" And that was true even before this pandemic caused people with office jobs to wfh.

 

I'm weeks late from what was the bottom in March, but so far the market has basically paid you to do what seem like obvious "its priced in" things. The obvious thing seems to me: a bunch of well-paid knowledge workers are now seriously comparing single family home life in suburbs or smaller cities with being cooped up in their expensive NYC (or wherever) apartment. Pre-covid, homebuilding stocks had also done quite well because (I think?) of demand from millennial demographic, low interest rates, and constrained supply. I can't say why, but they did pretty well anyways.

 

Now, homebuilders seem like a good way to be long the big city -> suburbia flow that's currently being prompted by demographics, pent up rent-is-too-damn-high frustration, pandemic, and WFH going increasingly mainstream.

 

Thoughts on this?

 

I get that some people hate work from home, but i think forcing everyone to do it is going to normalize it for many companies and help many people discover that they like it and it could work for them.

[Guest cherzeca]

there are a lot of variables that affect home builders, such as interest rates, employment, lumber and concrete costs, etc.  while I think you premise is correct, I dont think the trend you have identified will move the needle for the sector.  now if millennials start have having families earlier and more often, then maybe you are on to something...

[dpetrescu]

My take on this:

 

1. Take a look at historic housing starts. We just recently reached about the average since the 1960s, with more then a decade of far below average starts.

https://fred.stlouisfed.org/series/HOUST

 

Homeownership vacancy rate has been on decrease since 2007

https://fred.stlouisfed.org/series/RHVRUSQ156N

 

 

2. Here’s an interesting interview about millennials

 

3. With that said, personally I wouldn’t invest in home builders. Just the fact that there are so many - they have no competitive advantage. They don’t have great balance sheets and to me don’t seem to be great 10 year or more holdings.

I’ve been investing in Simpson StrongTie SSD for  more than half a decade - it’s been between 50% to 70% of my entire holdings. It’s a perfect company - it sells connectors used in wood construction. It has owned about 50% market share for decades in a very specific market with huge barriers to entry, It made a GAAP profit through every year of the Great financial recession (of course much smaller In 2007-2010 but still profitable), no one knows about them - there are no interviews and no comments/discussions on CNBC or online, it has a great dividend, and it has just one other competitor (part of a subsidiary owned by Buffett), they have great margins and profitability, they have such a great balance sheet and can withstand recessions - this is intentional and they talk about this at earnings calls. They announced Q1 2020 with significant earnings increase YOY a couple days ago. With that said there are risks

A) keep in mind I’m very biased since this has been a majority long term holding

B) about 50% of their profits is dependent on housing starts

C) they already recovered quite a bit

D) although a great Q1 2020, they did say they had double digit sales decrease in April so far YOY

E) US Population growth used to average more than 1%, it is now about 0.5%.

https://data.worldbank.org/indicator/SP.POP.GROW?end=2018&locations=US&start=1960&view=chart

F) I’m hoping someone can convince me to change my mind

[KJP]

 

3. With that said, personally I wouldn’t invest in home builders. Just the fact that there are so many - they have no competitive advantage. They don’t have great balance sheets and to me don’t seem to be great 10 year or more holdings.

 

Simpson looks like a strong company, and I agree with you about most home builders, which are too weighted towards levered land speculation.  NVR, however, has historically been an exception.  It's long-term returns are even better than Simpson's.  The earnings of both companies are driven by new home sales (NVR even more so than Simpson). 

 

Simpson is trading at 25x 2019 earnings, while NVR is trading at ~15x 2019 earnings.  What is the scenario in which Simpson outperforms NVR?

[LC]

Anyone who's ever wandered home depot knows all about simpson strong tie.

[dpetrescu]

I’m not familiar with NVR. Just looked it up, it does have a low PE ratio. Do you feel confident that it will be around and earnings and revenue will continue to increase for the next 30 years? (Assuming home starts average average what it has in the last 60 years.

 

 

3. With that said, personally I wouldn’t invest in home builders. Just the fact that there are so many - they have no competitive advantage. They don’t have great balance sheets and to me don’t seem to be great 10 year or more holdings.

 

Simpson looks like a strong company, and I agree with you about most home builders, which are too weighted towards levered land speculation.  NVR, however, has historically been an exception.  It's long-term returns are even better than Simpson's.  The earnings of both companies are driven by new home sales (NVR even more so than Simpson). 

 

Simpson is trading at 25x 2019 earnings, while NVR is trading at ~15x 2019 earnings.  What is the scenario in which Simpson outperforms NVR?

[gfp]

Not to get this topic off track, but this announcement is a big negative for Berkshire's USP subsidiary.  USP and Simpson are imbedded in basically all building codes - at least in this country.  But Berkshire's USP was available at Lowe's while Home Depot carried Simpson.  Looks like USP has lost that relationship.  USP is a subsidiary of MiTek.

 

https://www.marketwatch.com/press-release/lowes-to-expand-pro-offering-with-simpson-strong-tie-products-2020-04-29?siteid=bigcharts&dist=bigcharts&tesla=y

 

Anyone who's ever wandered home depot knows all about simpson strong tie.

[Gregmal]

The only homebuilders I would look at owning in this environment are NVR and GRBK.

[KJP]

I’m not familiar with NVR. Just looked it up, it does have a low PE ratio. Do you feel confident that it will be around and earnings and revenue will continue to increase for the next 30 years? (Assuming home starts average average what it has in the last 60 years.

 

 

3. With that said, personally I wouldn’t invest in home builders. Just the fact that there are so many - they have no competitive advantage. They don’t have great balance sheets and to me don’t seem to be great 10 year or more holdings.

 

Simpson looks like a strong company, and I agree with you about most home builders, which are too weighted towards levered land speculation.  NVR, however, has historically been an exception.  It's long-term returns are even better than Simpson's.  The earnings of both companies are driven by new home sales (NVR even more so than Simpson). 

 

Simpson is trading at 25x 2019 earnings, while NVR is trading at ~15x 2019 earnings.  What is the scenario in which Simpson outperforms NVR?

 

I can't vouch for any business for the next 30 years, so I can't help you there.  You seem to have extensive knowledge of Simpson, so it makes sense that you have great confidence in it.  You also seem to believe it enjoys a very profitable niche in the industry, particularly versus homebuilders.  You can look at a long-term stock chart of most homebuilders and see that, most of the time, you're absolutely right. 

 

But NVR has long been a special case, rather than just a transient "low p/e" opportunity:

 

January 1, 1995/Today/CAGR

Simpson:  ~$2.70/$73.23/14% -- Very good!  This certainly supports your belief that Simpson is a very good business

NVR:  ~$5.50/$3090/28% -- Incredible!

 

I don't know what the future entails, and things could change.  But the last 30 years at least suggest that it is possible that NVR at 15x is a better bet than Simpson at 25x.

 

Full disclosure:  I currently own neither because I foolishly cling to the belief that I can time the market on NVR.

[dpetrescu]

Thanks for the reference, that is pretty impressive long term growth. I have a short list of great companies that I’ve been waiting on, some for years. We’ll see if the previous lows get retested.

[Broeb22]

The only homebuilders I would look at owning in this environment are NVR and GRBK.

 

What's your take on GRBK and owning them in this environment?