Seeking Alpha
Profile| Send Message|
( followers)  
The bargain bin approach can be very rewarding in our industry. But it is something that is very hard and needs time and practice. Right now many voices are saying that the builders are a good pick for this kind of strategy. They say that the P/E is so low that it makes sense to own these stocks. At 4 to 6 times the P/E I agree it is very cheap and normally you would be sure to make some money.

But you need to ask why there is this low valuation and you need to know if the valuation is correct. I have taken a look at some of the major builders' financial statements with one thing in mind: what is the correct valuation when you take out the bubble premium. So I took a look at the earnings for 2001 and 2002 assuming that this will be the correct valuation for the future because the bust of the bubble will probably bring down the number of houses they will build and the price of the house.

  • Brookfield Homes (BHS) Earning for 2005 : 7.04$ Before the bubble 2001: 1.23$ 2002: 1.35$ average : 1.29 valuation at current price with pre-bubble earning: P/E of 20 to 21
  • Toll Brothers (NYSE:TOL) Earning for 2005 : 4.78$ Before the bubble 2001: 1.38$ 2002: 1.46$ average : 1.42 valuation at current price with pre-bubble earning: P/E of 19 to 20
  • Pulte Homes (NYSE:PHM) Earning for 2005 : 5.47$ Before the bubble 2001: 1.52$ 2002: 1.79$ average : 1.66$ valuation at current price with pre-bubble earning: P/E of 19 to 20
  • Centex (CTX) Earning for 2005 : 7.64$ Before the bubble 2001: 2.18$ 2002: 3.58$ average : 2.88$ valuation at current price with pre-bubble earning: P/E of 18 to 19
  • Meritage Homes (NYSE:MTH) Earning for 2005 : 8.88$ Before the bubble 2001: 2.15$ 2002: 2.66$ average : 2.41$ valuation at current price with pre-bubble earning: P/E of 18 to 19
  • Ryland Group (NYSE:RYL) Earning for 2005 : 9.03$ Before the bubble 2001: 2.32$ 2002: 3.32$ average : 2.82$ valuation at current price with pre-bubble earning: P/E of 16 to 17
  • KB Home (NYSE:KBH) Earning for 2005 : 9.53$ Before the bubble 2001: 2.75$ 2002: 3.58$ average : 3.17$ valuation at current price with pre-bubble earning: P/E of 14 to 15
  • Lennar (NYSE:LEN) Earning for 2005 : 8.23$ Before the bubble 2001: 2.73$ 2002: 3.51$ average : 3.12$ valuation at current price with pre-bubble earning: P/E of 14 to 15
  • Beazer Homes (NYSE:BZH) Earning for 2005 : 5.87$ Before the bubble 2001: 2.73$ 2002: 3.58$ average : 3.14 valuation at current price with pre-bubble earning: P/E of 12 to 13
  • D R Horton (NYSE:DHI) Earning for 2005 : 4.71$ Before the bubble 2001: 2.23$ 2002: 2.87$ average : 2.55$ valuation at current price with pre-bubble earning: P/E of 9 to 10
  • M D C HOLDINGS (NYSE:MDC) Earning for 2005: 10.99$ Before the bubble 2001: 5.20$ 2002: 5.48$ average: 5.34$ valuation at current price with pre-bubble earning: P/E of 9 to 10
  • Now you have a much clearer picture of the correct valuation for the builders. You still have to add a risk premium. Normally when an industry is going down a lot of dirt will be uncovered; I won’t be surprised if some of the builders take some charge on the future for houses not sold, higher cost of financing because of houses not sold and so on. After that, if you still think that some of the builders are a good buy you need to take a look at the 10k or 10q filings to see where they are building and to monitor the real estate market in this sector to see if the market will be more or less affected by the bust of the bubble.

    Comment on this article

    Source: What Is Correct Way to Value Homebuilders?