What's Book Value Worth for Homebuilders?

Do people care about price to book value when they buy a stock? For a given stock on Google Finance, you won't find the price to book value shown anywhere on the page. On Yahoo's finance site, you have to scroll down the 12th page of info (titled 'Statistics') to find the P/B. It would seem P/B is not an important measure in investor's minds.

For companies like Microsoft (MSFT) and Accenture (ACN), book value won't help you figure out the intrinsic value of the company. Their assets are knowledge based. But are there some companies out there where book value is an appropriate measure for intrinsic value?

Consider land developers. They acquire land for the purpose of development, and for the most part try to sell those developments as soon as they can. I would argue that book value is a pretty decent approximation of the intrinsic value of those companies. Sure, it's not perfect. In some cases, land could have been purchased years ago, and is therefore underestimated at strictly book value. So you still have to dig into the financial statements of the company to figure out what the properties are worth, but as a screening tool, looking for a low P/B ratio can be useful.

Here's the price to book ratio since 1985 for several large US homebuilders (Centex (CTX), Hovnanian (HOV), Lennar (LEN), Toll (TOL), DR Horton (DHI), Beazer (BZH)):

A couple of interesting things are going on here. We do see some irrational exuberance at times, where companies are trading for 3 or more times book value, but they come crashing back down when times aren't so great. In the 1980s we may be seeing the high inflationary times drive up the appetite for hard assets such as real-estate. In the early 2000s we see the runup in valuations of pretty much every builder.

We can also see times when it looks like these stocks are great bargains. During the 1991 recession, they're all trading below book value, and in many cases with large margins of safety!

Today, we see these stocks trading near the bottom of their P/B range. Could this be a buying opportunity? This chart clearly shows there currently aren't huge expectations built into these stocks. But there could still be more writedowns to come, which would reduce book value. Therefore, you'll want to look for a healthy margin of safety before jumping in.

Also consider that these are the largest, most famous US homebuilders. Smaller builders may have less analyst coverage and so may represent bigger bargains!

Comments

[Eric Fox:]

Book value is key for buying Homebuilders...the problem is that the book value is still free falling every quarter.

2008 Jun 10 04:51 PM

[madoff:]

survivorship bias - what does the chart look like when you add in all the names where P/B kept falling and falling and falling to 0 ... and then disappeared

2008 Jun 11 10:53 AM

[Abe Mishima:]

P/B is meaningless. Cash flow is far more important. The burn rate and projected time to reverse negative net income are the critical numbers to get an estimate on. The longer the recovery takes, the more likely we are to see credit downgrades and possible bankruptcy. In BK, the common shareholder would probably get nothing. If just one of the major homebuilders has to file for BK, it will take all homebuilders down. Even if no builder goes belly up, the time to straighten out the balance sheet keeps growing longer and longer. Thus a 2:1 to 4:1 drop in the stock price relative to the 52-week high is not only a reality, but a deserved decline in the pps of these stocks.

2008 Jun 11 12:28 PM

[Eric Fox:]

Abe....the HB's say they are cash flow positive now. Does this mean you are a buyer even though the value of their assets fall 10-20% each quarter?

2008 Jun 11 01:39 PM

[mythoughts:]

Anyone buying a homebuilder stock now is probably also buying Lehman LEH.

2008 Jun 11 02:25 PM

[Saj Karsan:]

If you can determine which home builders can actually survive the downturn (by analyzing their financials), you can buy the builders trading at a discount to their book values

2008 Jul 04 01:53 PM