Orleans Homebuilders' Discount Looks Enticing

| About: Orleans Homebuilders (OHB)

Like most homebuilders, Orleans Homebuilders (OHB) has been hit hard over the past six months. A few months ago, most investors seemed willing to believe the real estate market would slow in an orderly fashion; recently, some pundits have been calling for an outright collapse and bust. Extremes of sentiment such as this often provide investors with excellent buying opportunities.

The chief concern here is that the U.S. housing market is slowing down more rapidly than expected and the nation's homebuilders are sitting on a significant inventory of unsold homes. It's true that the housing market has slowed considerably since late in 2005 -- one has only to look at a chart of housing starts to see that there is less robust activity this year than last year. However, the housing market is slowing from a red-hot pace, as 2003 through 2005 was one of the strongest real estate markets in U.S. history.

Moreover, the recent slowdown is still far from a collapse. In fact, the recent downtick in interest rates may already be starting to stabilize the market.

OHB reported in August that it has seen a significant uptick in order cancellations -- homebuyers who are simply walking away from homes they've ordered. This situation is most acute in previously ultra-hot markets like Florida. Moreover, OHB has reported a significant drop in order activity. With these factors in mind, management has cut its guidance for the remainder of the year. The stock has been falling steadily on that news; shares in OHB now trade at a trailing P/E of under four.

But the news for OHB is far from terminal. Even after the guidance cut, OHB should earn close to $1.35 per share this year. Based on current prices, that works out to a multiple of barely ten times earnings. And if the property market does experience a soft landing, then OHB will easily beat those estimates. Bottom line: with long-term growth near +8%, OHB is starting to look much more compelling at current levels.

Although it might still be a bit too early for investors to jump back into shares of OHB and other homebuilders, I'm going to place the industry back on my radar screen, and my staff and I will likely issue further guidance on this important topic in the coming months.

Disclosure: Author has no position in OHB