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Summary

  • Century Communities witnessed a disappointing public offering.
  • The homebuilder is showing solid growth, is profitable and operates with a strong balance sheet.
  • Shares are actually appealing at current levels in my opinion.

Century Communities (NYSE:CCS) is a home builder, engaged in all aspects of the business. The company is active in the metropolitan markets of Colorado, but also Austin, San Antonio and Las Vegas more recently.

The company which has been founded little over a decade ago is showing rapid growth and recently completed a big acquisition, expanding into Las Vegas. The strong growth, inventory and solid balance sheet makes me optimistic after shares have seen a disappointing offering.

The Public Offering

Century Communities focuses on the design, construction and sale of single-family detached and attached homes. So far the company has built a total of 2,700 homes, generating revenues of about $750 million in the process. The company is ranked in the top 50 of largest US homebuilders, being the 5th fastest growing company in the sector by revenues.

Century Communities sold 4.48 million shares for $23 apiece, thereby raising $103 million in gross proceeds. 4 million shares were offered by the company generating proceeds of $92 million while the remainder of he shares were offered by selling shareholders.

The offering was priced at the low end of the preliminary offering range of $23 to $26 set by the firm and its bankers. Shares fell on their opening day and at current levels around $21 per share, the company is valued around $451 million.

The major banks that brought the company public were J.P. Morgan, Deutsche Bank, FBR, Zelman Partners and Builder Adviser Group.

Valuation

The company prides itself for being profitable every single year since being founded. This includes the recession of 2008 when many other builders simply went bankrupt or were required to restructure their business in a significant way.

The company owns or controls 99 communities which contain a total of 10,095 lots in various stages of developments. In the core business plan, Century Communities develops on a very local basis with access to metropolitan areas. A diverse economic and employment base, as well as population growth, are key selection areas for the main markets being targeted by the company.

Back in April, Century Communities acquired Las Vegas Holdings in a $165 million deal. The company targets homes ranging from $215,000 to $500,000 while holding a total of 1,761 lots. The business posted revenues of $75.5 million in 2013 on which it earned about $4.5 million.

For the year of 2013, Century Communities reported revenues of $171.1 million which is up 78.2% compared to the year before. Earnings attributable to shareholders more than doubled to $12.4 million. Including the business from Las Vegas Holdings, the company would have posted revenues of $246.7 million in 2013 on which it earned $16.8 million.

On a pro-forma basis, the company delivered 704 homes in 2013 at an average price of $345,560. The company took in 778 new orders, which resulted in a book-to-bill ratio of 1.11 and increased the backlog to 278 homes.

Revenues for the first quarter of 2014 came in at $64.9 million including Las Vegas Holdings, while the core operations doubled their revenues. Reported earnings came in at $4.7 million.

Following the Las Vegas Holdings deal, Century Communities held $20 million in cash and $102 million in debt. The company issued $200 million in notes after the first quarter, used to retire its previous bank debt. Adding in the $92 million in gross proceeds and the company will operate with a roughly flat net cash position.

The $451 million equity valuation values the pro-forma business at 1.8 times annual revenues and 26-27 times annual earnings.

Investment Thesis

As noted above, the public offering of Century Communities has been a disappointment. Shares were offered at the low end of the preliminary offering range, some 6.1% below the midpoint of the initial range. Shares fell on their opening day, trading around $21 per share at the moment which is roughly 15% below the midpoint of the preliminary offering range.

The valuation in terms of revenues is fair, even as net profit margins are slim. The company controls a huge backlog of lots and furthermore has a solid balance sheet, net holding no debt.

While the housing market is seeing a nice uptick, the market is far removed from its peaks in 2005-2007. Rising housing prices and limited mortgage availability are limiting demand. Other risks include potential higher interest rates, geographic concentration of activities and slim margins. The backlog is growing, but represents just a few month worth of deliveries at the moment.

The two Francescon founders each will hold 16.5% following the offering, which is a comforting sign. I really like the growth and the balance sheet, yet slim margins and a high price-earnings multiple are a modest worry.

Given the discount on the offer price, shares might actually be more appealing with forward earnings in 2014 set to increase markedly given the still very strong operating growth with first quarter revenues doubling on the year before. I am cautious buyer for a modest position in the $20 area.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Century Communities - Disappointing Debut Of Fast-Growing And Profitable Home-Builder Creates Opportunities