Is Forestar Group an Investment or Speculation?

| About: Forestar Group (FOR)

From Google Finance:

Forestar Group Inc. (NYSE:FOR), formerly Forestar Real Estate Group Inc., owns directly or through ventures, over 251,000 acres of real estate located in nine states and 12 markets, and about 620,000 net acres of oil and gas mineral interests. It has three segments: Real estate, mineral resources and fiber resources. The Company secures entitlements and develops infrastructure, primarily for single-family residential and mixed-use communities. Forestar’s mineral resources segment is engaged in the exploitation, exploration and development of oil and gas on its 620,000 net mineral acres. The four principal areas of operation include Texas, Louisiana, Alabama and Georgia. Its fiber resources segment sells wood fiber from the Company’s land, primarily in Georgia, and lease land for recreational uses. During the year ended December 31, 2009, it sold about 95,000 acres of timber and timberland in Georgia and Alabama.

Friday's Last Price 18.35
52 Week High 23.54
52 Week Low 10.1

Does FOR make for an intelligent investment or intelligent speculation today?

Starting with a base estimate of annual Net Income Flow at a value of approximately $60,000,000 and the number of shares outstanding at 36,420,000 shares; we used an assumed FCF annual growth of 5 percent for the first 10 years and assume zero growth from years 11 to 15. Review the Net Income Flow record here:

The resulting estimated intrinsic value per share (discounted back to the present) is approximately $22.59.

Market Price = $18.35
Intrinsic Value = $22.59 (estimated)
Debt/Equity ratio = .4
Price To Value (P/V) ratio = .81 and the estimated bargain = 19. percent.

Before we make a purchase, we must decide ( filter #1 ) if FOR is a high quality business with good economics. Does FOR have ( filter #2 ) enduring competitive advantages, and does FOR have ( filter #3 ) honest and able management.

The current price/earnings ratio = 11.
Its current return on capital = 7.94.
Using a debt to equity ratio of .4, FOR shows a 5-year average return on equity = NA/

Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.

Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The best companies sustain a competitive advantage, produce Net Income Flow, and use debt wisely.

Does FOR make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?

Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised. In terms of Opportunity Cost, is FOR the best place to invest our money today?

Time forward projection:

How will FOR compete going forward? Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.

In summary, using a debt to equity ratio of .4, FOR shows an estimated intrinsic value per share (discounted back to the present) of approximately $22.59. The Market Price = $18.35 and the Debt/Equity ratio = .4
The Price To Value (P/V) ratio = .81 and the estimated bargain = 19. percent.
Going forward, are there any tranformational catalysts or condition indicators imaginable on the horizon?

Disclosure: No positions

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