Small Homebuilders: A Bargain vs. Book Value

In a previous post, we saw that homebuilders' market values track decently well with their book values. But those were the largest of homebuilders. Here, we look at Price to Book values for the smallest cap builders. All of these companies (Brookfield (BHS), Comstock (CHCI), Meritage (MTH), Orleans (OHB), California Coastal (CALC) and Tousa) have market caps under $500 million, so they may present opportunities that the large builders don't, as we've discussed here in our discussion about why smallcaps are better investments.

Once again, we see periods of fear as well as exuberance for these stocks. In the early 90s, there was some tremendous opportunity to buy these companies for presumably much less than the land they own! It took several years, but eventually, by the mid to late 90s, those investors got rewarded.

In the first half of this decade, we saw clear evidence that the market was extremely optimistic on land values, as investors were willing to pay more than 3 times book value for many of these companies.

Today, we see some possibilities for some great opportunities. Many of these small companies are trading for much less than their book values. Of course, P/B is just a screening tool. One still has to dig into the financial statements of these companies and make sure there is value there to be had. But if this screen is any indication, there may be an opportunity to buy real estate at bargain prices through these companies, presuming there is a margin of safety to cover any write downs!

Comments

[Russell Ups...:]

BHS, back around November of 2005, had a tender offer for their shares at $55. At that time and currently, BHS was a subsidiary of Canadian conglomerate Brascan, now known as Brookfield Asset Management (BAM). Brascan tendered 10 million of their own shares of BHS, so I tendered all of mine. The stock has tanked since thenGuess who has been buying back the shares on the cheap since then? I wouldn't go near that stock. Foreclosures were just up 48% over last year. The top three states were California, Nevada and Florida. BHS operates in two main areas- California and the Washington, D. C. area. They only have 10 million in cash and 800 million in debt. The recession is yet to come

2008 Jun 14 04:50 PM

[ucla654:]

Your presumption that "there is a margin of safety to cover any write downs" is rather understated in importance and your thesis. Just two examples:

<CHCI> is holding inventory that currently can't be sold. The Florida economy is over-speculated and suffers one of the highest property tax rates in the USA. Literally, people are selling homes for taxes now. So, if Comstock can't sell their FL inventory, they can't make their bank payments (swing loans) acquired for build-out. If they can't make their bank payments, they'll foreclose and we've reached endgame for the company, or "reorganization" (a polite corporate word for bankruptcy). In that instance the stock's market value equals nil or zero.

Similarly, <CALC> has most of their inventory in Riverside County, a disaster of double digit home price deflation. The market had previously heated up as the working class employed decided to commute several hours daily to their jobs in Los Angeles from their "affordable" home in Riverside, where they could get more space for their family than in LA for less money. Problem: gas prices + labor cuts + over-speculation = dramatic price falls for Riverside. As such California Coastal has gross inventory that can't be sold. A small portion of <CALC> inventory is on Huntington Beach. Great?! Well, now that prices have dropped, <CALC> won't be able to afford to build-out and sell the few remaining lots they're holding. Even if they could, it wouldn't be enough to balance their books. Maybe Coastal will have another huge stock dilution to cover their red ink. Maybe they'll just squeak by for at least two - three years, that will be required before real estate prices bottom.

But before then, both of these companies are extremely high risk buys.

2008 Jun 20 03:47 PM

[daver:]

CHCI does not have real estate in Florida. You better check your facts. They are mostly around Washington, DC with smaller holdings in Atlanta and Charlotte.

2008 Jun 30 12:21 PM