The housing industry in the U.S. is showing signs of tremendous growth as home prices have gone up by the highest amount in almost seven years this spring, signifying that consumer confidence has been retained by the housing sector. House prices in all the major states of the U.S. are rising, and the market is expected to maintain the same momentum throughout FY13. With this rapid growth and low projections of risks in the future, housing companies are now decent investments for the financiers.
For the first time since April 2006, the S&P Case Shiller Composite index of 20 metropolitan cities has hiked up by 10.9% year over year, going above the 10.2% increase expectations. After 2012, factors like the escalation of the recovery rate and low mortgage rates have helped the housing market to gain back its strength. Prices in the 20 major metropolitan cities have increased more than the economists' projections, showing that the consumer is showing great interest in the market. Even after the tighter fiscal policy set by the U.S. government, the housing market is still expected to grow at a steady rate, and due to these expectations the stock prices of homebuilding firms would rise.
The graph above shows the performance of three stocks comparative to each other and to the performance of stocks of cyclical goods and services. Out of the lot, Standard Pacific Corp. (NYSE:SPF) is outperforming its major competitors in the industry. The stock of SPF has gone up by an impressive 30% since the beginning of FY13, whereas its competitors DR Horton Inc. (NYSE:DHI), PulteGroup Inc. (NYSE:PHM) and the Lennar Corp. (NYSE:LEN) are performing at 25%, 28% and 5%, respectively. SPF is also outperforming the index of companies which offer cyclical goods and services.
SPF Business Analysis
SPF is an American house building company which runs a geographically diverse business in major metropolitan cities of the U.S. including California, Florida, the Carolinas, Texas, Arizona, and Colorado. The company has a wide range of prices and sizes, meaning it can offer construction of houses to cater to consumers looking for luxury to entry-level homes (Source: Company Financials).
The company is showing bright signs of progress, which is why its issuer default rating (IDR) has been upgraded from B- to B by Fitch Ratings. Fitch has even upgraded the outlook of SPF from stable to positive. This is because of the aggressive strategy of SPF on growing its investments in new communities, especially in land-constrained areas. The company has spent a lot over the past few years, and is increasing its land holdings.
The table above shows the increase in SPF's spending on the purchase of new land. The company increased its investment from $158 million in FY09 to $336 million in FY10 and $437 million in FY11. The investment in the first nine months of 2012 was about $443 million, and was projected to end between $600 and $700 million. Furthermore, the company's cash flows were negative to around $300 to $400 million in FY12, and expected to decline in FY13 because the company would carry on with its strategy of land acquisition in the country. Fitch Ratings is expected to upgrade the IDR rating of the company from B to B+ if the company keeps on with its performance in a similar manner.
According to the table above, it is evident that SPF is highly undervalued on the basis of price-to-earnings ratio, as it has a P/E of 6.2 compared with the P/E of 13.55 of its major competitors and a P/E of 39.7 for the industry. Similarly, it is also undervalued on the basis of price-to-book ratio, against the 2.3 of the industry and its competitors average, the P/B of SPF is 1.4. So on the basis of these factors, we can project that SPF has an evident tendency to grow in the future.
The liquidity of the company is not an issue, for it is enough to pay off its liabilities. A dip can be seen in the current ratio in 2011, but in the next year it improved substantially. Financial leverage and debt-to-equity are posing a bit of a threat for the company, as the current debt-to-equity ratio is 1.3 and the industry average is 1.1. So is the case with financial leverage, but the trend of both these indicators has been on a decline for the past few years, which is a positive mark for SPF.
With the boom in the U.S. housing industry, the financial performance of the companies in this sector is quite sound. The prices of houses are going up and investors are confident about its holdings in this sector. In this scenario, Standard Pacific Corp. , with its aggressive capital spending on land holdings all over the country and a revenue growth of 40.76% YoY, is an attractive stock for investors. Thus, I would suggest a buy on the SPF stock.