Homing in on WCI Communities

Includes: KBH, WCIM
by: Alex Garcia

After KB Homes (NYSE:KBH) reported a horrible 4th quarter, I thought I would look around to see what was going on in the homebuilders.

Well, it didn’t take me long to find something interesting.

The homebuilders companies are still suffering loses with CEOs seeing no end in sight. On the other hand, the stocks have kept going up despite companies' reporting. Two things might be causing this. First, the market is up substantially without any big dips and is simply carrying the homebuilders with them. Second, institutions are feeling the end is near and the housing sector might be headed for good times.

What I did find though is an opportunity. On Monday, WCI Communities (WCI) decided to hire Goldman Sachs (NYSE:GS) to explore options on how to increase shareholder value. The stock jumped 7% on the news.

Usually when a company announces itself for sale, the stocks jump at least double digits. Why didn't WCI jump? I think so much attention was put on the possible sale of Alcoa (NYSE:AA), that no news was made about WCI. The stock had another great day Wednesday (2.14.07), going up 5%, but I still think it’s a bargain by all contrarian measures.

First, the company profile from yahoo finance:

WCI Communities, Inc., an integrated homebuilding and real estate services company, engages in the design, construction, and operation of leisure-oriented and master-planned communities. It operates in three segments: Traditional Homebuilding, Tower Homebuilding, and Real Estate Services. The Traditional Homebuilding segment targets leisure-oriented home purchasers. The Tower Homebuilding segment includes sales of lots. The Real Estate Services segment engages in the real estate brokerage, mortgage banking, and title operations.

The company also develops and operates amenity facilities; sells selected land parcels; and enters into real estate joint ventures. It conducts its operations in Florida, New York, New Jersey, Connecticut, Massachusetts, Maryland, and Virginia. WCI Communities was founded in 1946 and is headquartered in Bonita Springs, Florida.

When looking at a company, the first thing to look for is whether a company is “healthy” enough to weather the storm. The company’s last 10-Q shows a 9 to 1 short term asset to liabilities ratio. Long term, it’s not as strong but shouldn’t be a problem. The company is trading 8 times earnings or right around its historical averages. This is right in line with the industry as a whole. Most homebuilders are trading below the market average. WCI is actually trading below it’s book value (book value is at $25 by the way), which is going to attract buyers.
wci hotel
The company reported a backlog of 1296 units that are worth just over a billion dollars. Currently, the company’s market cap is 968 mill. Of course, the value of the units reflects the value at the time the company reported its results but most of the units are in rich Florida land. It’s no secret that Florida land is good land. It ranks up there with California, Arizona, Texas and Nevada (really Las Vegas), as the country's hot spots.

The company has hired Goldman Sachs as an adviser to better increase shareholder value. These options include stock repurchase and the possible sale of the company. In other words, they are going to sell the company. The folks at Goldman are good at what they do. In addition, some guy by the last name of Icahn is buying the stock. The pressure is on management to do something and chances are it will be sold.

What happens if no buyers knock on the door?

One of the following scenario’s will play out:

1. You're stuck with a decent company with a lot of land
2. The company will repurchase tons of stock
3. Icahn buys more stock and puts on more pressure
4. Dividend increase
4. I will look like a fool

Disclosure: I will be adding WCI to the WSL Portfolio.

WCI 1-yr chart

wci chart