I have an additional investment in Gafisa (GFA) which I began this week. From the reports I have read, the Brazilian home building sector is reminiscent of ours during the summer of 2011. Mortgages as a percentage of GDP (5%) are very low; the public is hoarding cash for fear of a stock market (commodity) crash.
I have read that the cash levels in Brazil today are the highest since 1995. In a country where inflation is an ever-present memory, owning a builder might not be a bad idea right now. Gafisa is a 50 year old company; the largest builder in Brazil. Their story (and $3.80 stock price) reminds me a lot of Pulte (PHM) a year ago. Goldmans downgraded the stock last week, and in 3 days, terrified investors dropped Gafisa shares 18%.
The other builder I like is Brookfield Properties (BRP) out of Canada. At 109,000 lots and counting, they are easily the most under-valued builder in North America.
I do not know who I would short in the building sector. Their fundamentals are very strong, however I do realize that many of them have already run 350% from their lows during the financial crisis.
If you re-read my article and add up the data points, I think you will see how I am approaching your first two questions. I only analyzed KBH. For the other builders, I simply compared my analysis to their stated book values, the assumption being (for comparison) that their BVs were accurate. Land and land developments have been greatly discounted in value. However, in a rising market, land becomes valuable currency and is a better place to invest cash because it can be monetized.
Inventories can be worth more than cash if they rise in value 7% year over year, and especially if demand for that inventory exceeds supply. KB's inventory is growing at CAGR of 33% and is being financed entirely out of operating income. Therefore a newer and more numerous inventory at a higher valuation is worth more than current inventory at current prices. Cash does not afford this growth prospect; rather, it affords safety. I believe the company is investing in land because it offers a higher rate of return (leverage) than cash, and the opportunity to monetize risk-capital.
You would be mistaken if you wished the home building industry - and especially a high beta stock like KBH - to be anything but boom or bust. Like semiconductors, home-building is cyclic. The sector trends, usually in a long cycle of 7 to 10 years of up, 3 dramatic years of crash, and 6 to 7 years of sideways. The last time similar to now was the 1990s.
What To Do With Your Homebuilder Stocks Now [View article]
Oildog. I agree. (BTW...this is my last "last" comment.)
Before getting too bearish on the builders after the big run up, investors might consider that Q4'2012 is to investors what the closing hour of the day is to high-frequency traders: you push the improbable into the close. This is the second year where the wise and the prudent have stood kibbitzing on the sidelines, while the pigs - who should have been slaughtered - are again feasting at the trough.
++++++++++++++++++++++...
“Me, Lord Marlboro, and the Dow?!” October 1, 2012 by Jeffrey Saut
"...The nearly four-month old rally of about 16% has left 90% of portfolio managers (PMs) under-performing the SPX. As year-end approaches, this under-invested crowd is now staring at not only performance risk, but bonus risk, and ultimately job risk. Indeed, just pull up a chart of the SPX and think about all of the under-invested participants that are NOT keeping up with the “Dow Jones” as they approach year-end performance report cards. Manifestly, it seems like everybody is unhappy.
To use the quote I referenced a few weeks ago from Merrill Lynch’s legendary strategist Bob Ferrell:
"Money managers are unhappy because 70% of them are lagging the S&P 500 and see the end of another quarter approaching. Economists are unhappy because they do not know what to believe: this month’s forecast of a strong economy, or last month’s forecast of a weak economy. Technicians are unhappy because the market refuses to correct, and gets more and more extended. Foreigners are unhappy because due to their under-invested status in the U.S., they have missed the biggest double play (a big currency move plus a big stock market move) in decades. The public is unhappy because they just plain missed out on the party after being scared into cash after the crash. It almost seems ungrateful for so many to be unhappy about a market that has done so well. ... Unhappy people would prefer the market to correct to allow them to buy and feel happy, which is just the reason for a further rise. Frustrating the majority is the market’s primary goal."
What To Do With Your Homebuilder Stocks Now [View article]
I think I have a better grasp of the company than the S&P analyst. When I add up the numbers, looks at the demographics of the geographies and the implied and actual returns, the calculations are not that complex, and, I think, are quite favorable for KBH.
I need to call the company to see if what I am seeing is actually correct - because I think KBH is undervalued. I know that Blackrock - the asset manager - now owns over 10% of the stock, and that's mostly recent purchases on their part - in the last 2 Qs.
My big question is the LT debt. What are they going to do long term about the debt? If they add a $100ML in cash to the balance sheet each quarter - while still remaining cash flow neutral on the operational side - that answers the question right there. I think that could happen for the next 5 quarters, but after what they have been through, nobody is promising anything.
I think their ultimate goal is something approximating a 1 to 1.4 relationship between cash and LT debt, and 1:1 for all near term debt under 5 years. To my pencil that's a billion in cash (without missing any great land deals along the way) and maybe $1.4BL in debt, with none of that being due til after 2020. How do they get there over the next 14-16 quarters? I'd like to know. I think the analyst community would too.
They have dodged the debt question now on the last 2 CCs, so maybe they think talk is cheap and wishful thinking at this point. But if they come up with some sort of roadmap for modest delevering, that would go a long way to supporting the fundamental story behind the shares.
What To Do With Your Homebuilder Stocks Now [View article]
Last comment from me. In retrospect, the attractive reasonings of bears often turn out to be lost opportunities in hindsight. That has been the case for the builders this year.
What To Do With Your Homebuilder Stocks Now [View article]
Actually I did that. They have increased their total lots owned or under control by 20% in the last year. All that's new stuff, and almost all of it in CA and TX, two of the hottest housing areas in the states right now (tech & Oil).
They scrubbed their inventory exhaustively at the end of 2011 and even their inland empire communities are showing strong demand. If they wanted to unload those inland communities for 80 cents on the dollar, they could probably do so. There is demand to take that land to development, and there are now builders specializing in luring renters away from renting - by building cheap homes in B and C locations (exurbs) farther out geographically from major metro areas.
All of this is easily perceived by reading Credit Suisse's Monthly Survey of Real Estate agents. KB is subject to the same demographics as other builders in specific geographic areas. So the quality of their inventory is increasing ($), next year the community count (of the new improved inventory) is going to rise 15% YoY from 2012, and all of those communities are going to have higher ASPs.
I understand your bearishness, and if one looks in the rear view mirror it is understandable. So many years...so many defeats. But that is not so going forward. A truer way to look at KB's billion dollar land spend in 2011-12 (which put in the hole) is that they would rather park their cash in developed lots at rock-bottom prices than in a bank on their balance sheet with no return except bragging rights. They LEVERAGED to the max at the bottom of the housing market. They didn't play it safe. They are a very aggressive public builder. ANY money spent on land-spend in highly desirable geographic areas in 2010-11 is going to pay a huge dividend in 2013-14.
I think there is another 50% rise coming in KB's shares between now and 1Q'2013. It happened for the other builders. Why not them?
What To Do With Your Homebuilder Stocks Now [View article]
Per the CFO's comments on the last CC
1) "...we do believe we'll add to our cash during the quarter and enhance our position even more. I think a couple of the other factors that sometimes investors miss, we do have $1.8 billion of inventory on our books. "
2) "...We ended the quarter with $467 million in total cash."
3) On a previous call he mentioned that the company's first $1BL in profits would be tax-sheltered.
So let's add it up, using Investopedia's definition of book value: "The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities."
$2.517BL minus $1.78BL = $0.737BL (assets after liabilities deducted) KB has 77.13 ML shares outstanding
$0.737BL/77.13ML = $9.56/share is book value At $14/share, KB is trading at 1.46 x Book value (BV).
Taking the tax benefit into account and applying 2.05 x book as a reasonable valuation, $20 is a fair price for KBH.
++++++++++++++++++++++...
Without the tax benefit (which is real nonetheless), the book value is $6.31. At $14/share, KB is now trading at 2.2 x Book value (http://bit.ly/zeTEos), in line with the other builders.
Without the tax benefit, If they add $100ML to their cash in Q4 the BV rises to $7.61, and if they do the same thing again in Q1'2013, the BV rises to $8.90. As their inventory rises in value (which is happening), the BV will also rise. More cash + higher value of inventory = increase of book value.
By my pencil, the share price could continue to rise towards $20 without the ratio of BV to share price increasing much; remaining steady somewhere between 1.5 to 2.0
++++++++++++++++++++++...
On last week's CC, management admitted to Ivy Zelman's question that all of their land purchases for planned communities for 2013 - and half of 2014's - were already locked up. Land and land development are the single biggest cost for a builder. If those costs are now "fixed" (except for minor margin adjustments for supply costs and labor) then the road map to increasing profitability for the next 7 quarters become clear (Q4'2012, 2013, 1H'2014): higher ASPs for higher square footage houses in higher-demand geographic areas (CA, TX, NV) to more affluent buyers (who they called the "upper third" of first time buyers).
I'll stick by my 1.5 to 2.0 x book value and a share price of $20-22 before this run is over. I see no reason to go non-bullish on KBH just yet. Because it's primary market is the very expensive CA coastal area - where it takes years to get permits before finally breaking ground - and CA is also the last state historically to leave a recession (current unemployment here is still between 10-12%) - the CA housing market and KBH with it are just getting started.
Yeah...I agree...hold the champagne. The invites have just gone out. The party for shareholders is gonna be in Q1'2013. The last time we came out of a housing recession was 1990-1995. If you look back at the historical charts from 1990-94, you will see that way back then Pulte was the big performer too, leaping 400% in a very short time frame, but then - about 6 months later - along came KBH with the same out-performance. I think KBH's current under-performance is because of CA's vulnerability to recession, but that will soon be resolved as the labor market improves. It is already happening.
At $15.33 today (as I write) KB is now up 50% in just two months. I think there is another 50% in the tank before it levels off a bit. All the things noted in this article are coming true, except with the additional exception that their developed lot purchases in highly-desirable geographic areas of CA and TX are now up 20% in the last year. This is more than I expected. The company is slowly beginning to hit on most of its cylinders. By Q1'2013, KB could be the Barry Bonds of Builders.
Wow..you're such a smart guy I hardly know what to say.
But hey look, if you see another bubble forming out there on the horizon - say, in the early stages - could you let me know so I could get in? Then I'll be debunker's best buddy.
You should hook up with Lakshman Acuthan and all the other "Another Recession is just around the corner" folks. They get all the news - and rile up all the fears - while the homebuilders keep following the energizer bunny.
It just amazes me that someone as bearish as you and as wrong as you would remain the #1 real estate commentator on Seeking Alpha. Now that's BULLISH!
Keep talkin em out of those profits, Markos.
It's true...it's all gonna end someday...and maybe it was a mistake for all those building stock mavens to have gone 4 to 1, 5 to 1, even 9 to 1 off the housing recovery bottoms of last year - but they did it anyway, all the way to the bank $, and on your most meticulous watch too.
I agree with you on the big picture, however. There is gonna be another recession someday some way, just not in the next year or so.
Bulls eat and Bears like tasty words; but the Pigs? They stuff themselves while the eaters eat and the bears tilt at yesterday's windmills.
Last time I read something from you the housing recovery was all wrong. Now everyone is too late. Hindsight is the worst investment out there. I guess there will always be something to debunk.
As a last comment...I just got an economic report from nospinforecast.com, a very reliable recession forecaster, and on page 24 of their August report (subscription only) they have a chart of "Total Real Estate Loans at Commercial Banks". Even with all the credit recovery we have seen in the last 4 years, this chart remains LOWER than at any time in the past 57 years. Real estate loans are literally "off the chart" on the downside.
The bean counter in me says that this under-performance can't last; that credit in this last of all recoveries will finally recover, and when it does, that too will be a tail wind for the housing market. What investors have to realize is we are coming out of the biggest bust in the U.S. in 80 years (someone's lifetime), rivaled only by the Great Depression. Yes there will be a "lost generation" somewhat akin to the 1930s, but for those who are able to get past this horrible roadblock, a house might be on their horizon because of what that creates and the Feds want. Housing (ownership, commitment) has always been incremental to the American Dream.
The Disputed Book Value Of KB Home [View article]
I have read that the cash levels in Brazil today are the highest since 1995. In a country where inflation is an ever-present memory, owning a builder might not be a bad idea right now. Gafisa is a 50 year old company; the largest builder in Brazil. Their story (and $3.80 stock price) reminds me a lot of Pulte (PHM) a year ago. Goldmans downgraded the stock last week, and in 3 days, terrified investors dropped Gafisa shares 18%.
The other builder I like is Brookfield Properties (BRP) out of Canada. At 109,000 lots and counting, they are easily the most under-valued builder in North America.
I do not know who I would short in the building sector. Their fundamentals are very strong, however I do realize that many of them have already run 350% from their lows during the financial crisis.
The Disputed Book Value Of KB Home [View article]
The Disputed Book Value Of KB Home [View article]
The Disputed Book Value Of KB Home [View article]
What To Do With Your Homebuilder Stocks Now [View article]
Before getting too bearish on the builders after the big run up, investors might consider that Q4'2012 is to investors what the closing hour of the day is to high-frequency traders: you push the improbable into the close. This is the second year where the wise and the prudent have stood kibbitzing on the sidelines, while the pigs - who should have been slaughtered - are again feasting at the trough.
++++++++++++++++++++++...
“Me, Lord Marlboro, and the Dow?!”
October 1, 2012
by Jeffrey Saut
"...The nearly four-month old rally of about 16% has left 90% of portfolio managers (PMs) under-performing the SPX. As year-end approaches, this under-invested crowd is now staring at not only performance risk, but bonus risk, and ultimately job risk. Indeed, just pull up a chart of the SPX and think about all of the under-invested participants that are NOT keeping up with the “Dow Jones” as they approach year-end performance report cards. Manifestly, it seems like everybody is unhappy.
To use the quote I referenced a few weeks ago from Merrill Lynch’s legendary strategist Bob Ferrell:
"Money managers are unhappy because 70% of them are lagging the S&P 500 and see the end of another quarter approaching. Economists are unhappy because they do not know what to believe: this month’s forecast of a strong economy, or last month’s forecast of a weak economy. Technicians are unhappy because the market refuses to correct, and gets more and more extended. Foreigners are unhappy because due to their under-invested status in the U.S., they have missed the biggest double play (a big currency move plus a big stock market move) in decades. The public is unhappy because they just plain missed out on the party after being scared into cash after the crash. It almost seems ungrateful for so many to be unhappy about a market that has done so well. ... Unhappy people would prefer the market to correct to allow them to buy and feel happy, which is just the reason for a further rise. Frustrating the majority is the market’s primary goal."
What To Do With Your Homebuilder Stocks Now [View article]
I need to call the company to see if what I am seeing is actually correct - because I think KBH is undervalued. I know that Blackrock - the asset manager - now owns over 10% of the stock, and that's mostly recent purchases on their part - in the last 2 Qs.
My big question is the LT debt. What are they going to do long term about the debt? If they add a $100ML in cash to the balance sheet each quarter - while still remaining cash flow neutral on the operational side - that answers the question right there. I think that could happen for the next 5 quarters, but after what they have been through, nobody is promising anything.
I think their ultimate goal is something approximating a 1 to 1.4 relationship between cash and LT debt, and 1:1 for all near term debt under 5 years. To my pencil that's a billion in cash (without missing any great land deals along the way) and maybe $1.4BL in debt, with none of that being due til after 2020. How do they get there over the next 14-16 quarters? I'd like to know. I think the analyst community would too.
They have dodged the debt question now on the last 2 CCs, so maybe they think talk is cheap and wishful thinking at this point. But if they come up with some sort of roadmap for modest delevering, that would go a long way to supporting the fundamental story behind the shares.
What To Do With Your Homebuilder Stocks Now [View article]
What To Do With Your Homebuilder Stocks Now [View article]
They scrubbed their inventory exhaustively at the end of 2011 and even their inland empire communities are showing strong demand. If they wanted to unload those inland communities for 80 cents on the dollar, they could probably do so. There is demand to take that land to development, and there are now builders specializing in luring renters away from renting - by building cheap homes in B and C locations (exurbs) farther out geographically from major metro areas.
All of this is easily perceived by reading Credit Suisse's Monthly Survey of Real Estate agents. KB is subject to the same demographics as other builders in specific geographic areas. So the quality of their inventory is increasing ($), next year the community count (of the new improved inventory) is going to rise 15% YoY from 2012, and all of those communities are going to have higher ASPs.
I understand your bearishness, and if one looks in the rear view mirror it is understandable. So many years...so many defeats. But that is not so going forward. A truer way to look at KB's billion dollar land spend in 2011-12 (which put in the hole) is that they would rather park their cash in developed lots at rock-bottom prices than in a bank on their balance sheet with no return except bragging rights. They LEVERAGED to the max at the bottom of the housing market. They didn't play it safe. They are a very aggressive public builder. ANY money spent on land-spend in highly desirable geographic areas in 2010-11 is going to pay a huge dividend in 2013-14.
I think there is another 50% rise coming in KB's shares between now and 1Q'2013. It happened for the other builders. Why not them?
What To Do With Your Homebuilder Stocks Now [View article]
1) "...we do believe we'll add to our cash during the quarter and enhance our position even more. I think a couple of the other factors that sometimes investors miss, we do have $1.8 billion of inventory on our books. "
2) "...We ended the quarter with $467 million in total cash."
3) On a previous call he mentioned that the company's first $1BL in profits would be tax-sheltered.
So let's add it up, using Investopedia's definition of book value: "The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities."
$1.8BL + $0.467BL + $0.25BL (tax-benefit on profits, 2012-14) = $2.517 BL
LT Debt = $1.78BL
$2.517BL minus $1.78BL = $0.737BL (assets after liabilities deducted)
KB has 77.13 ML shares outstanding
$0.737BL/77.13ML = $9.56/share is book value
At $14/share, KB is trading at 1.46 x Book value (BV).
Taking the tax benefit into account and applying 2.05 x book as a reasonable valuation, $20 is a fair price for KBH.
++++++++++++++++++++++...
Without the tax benefit (which is real nonetheless), the book value is $6.31. At $14/share, KB is now trading at 2.2 x Book value (http://bit.ly/zeTEos), in line with the other builders.
Without the tax benefit, If they add $100ML to their cash in Q4 the BV rises to $7.61, and if they do the same thing again in Q1'2013, the BV rises to $8.90. As their inventory rises in value (which is happening), the BV will also rise. More cash + higher value of inventory = increase of book value.
By my pencil, the share price could continue to rise towards $20 without the ratio of BV to share price increasing much; remaining steady somewhere between 1.5 to 2.0
++++++++++++++++++++++...
On last week's CC, management admitted to Ivy Zelman's question that all of their land purchases for planned communities for 2013 - and half of 2014's - were already locked up. Land and land development are the single biggest cost for a builder. If those costs are now "fixed" (except for minor margin adjustments for supply costs and labor) then the road map to increasing profitability for the next 7 quarters become clear (Q4'2012, 2013, 1H'2014): higher ASPs for higher square footage houses in higher-demand geographic areas (CA, TX, NV) to more affluent buyers (who they called the "upper third" of first time buyers).
I'll stick by my 1.5 to 2.0 x book value and a share price of $20-22 before this run is over. I see no reason to go non-bullish on KBH just yet. Because it's primary market is the very expensive CA coastal area - where it takes years to get permits before finally breaking ground - and CA is also the last state historically to leave a recession (current unemployment here is still between 10-12%) - the CA housing market and KBH with it are just getting started.
Yeah...I agree...hold the champagne. The invites have just gone out. The party for shareholders is gonna be in Q1'2013. The last time we came out of a housing recession was 1990-1995. If you look back at the historical charts from 1990-94, you will see that way back then Pulte was the big performer too, leaping 400% in a very short time frame, but then - about 6 months later - along came KBH with the same out-performance. I think KBH's current under-performance is because of CA's vulnerability to recession, but that will soon be resolved as the labor market improves. It is already happening.
KB Home As A Turnaround Play [View article]
Housing Sector Gains Will Continue [View article]
But hey look, if you see another bubble forming out there on the horizon - say, in the early stages - could you let me know so I could get in? Then I'll be debunker's best buddy.
Housing Sector Gains Will Continue [View article]
Measuring Mortgage Activity [View article]
It just amazes me that someone as bearish as you and as wrong as you would remain the #1 real estate commentator on Seeking Alpha. Now that's BULLISH!
Keep talkin em out of those profits, Markos.
It's true...it's all gonna end someday...and maybe it was a mistake for all those building stock mavens to have gone 4 to 1, 5 to 1, even 9 to 1 off the housing recovery bottoms of last year - but they did it anyway, all the way to the bank $, and on your most meticulous watch too.
I agree with you on the big picture, however. There is gonna be another recession someday some way, just not in the next year or so.
Bulls eat and Bears like tasty words; but the Pigs? They stuff themselves while the eaters eat and the bears tilt at yesterday's windmills.
Housing Sector Gains Will Continue [View article]
Housing Sector Gains Will Continue [View article]
The bean counter in me says that this under-performance can't last; that credit in this last of all recoveries will finally recover, and when it does, that too will be a tail wind for the housing market. What investors have to realize is we are coming out of the biggest bust in the U.S. in 80 years (someone's lifetime), rivaled only by the Great Depression. Yes there will be a "lost generation" somewhat akin to the 1930s, but for those who are able to get past this horrible roadblock, a house might be on their horizon because of what that creates and the Feds want. Housing (ownership, commitment) has always been incremental to the American Dream.