Century Communities, Inc. (NYSE:CCS) -- BUY RECOMMENDATION - Price Target $24.50.
The 25-day quiet period on underwriter research related to CCS will conclude on July 12, allowing the IPO underwriters to publish positive reports on CCS on July 13. CCS appears to be recovering from its weak market debut, and has posted a profit in every quarter since its founding. The upcoming quiet period expiration represents a fresh opportunity for investors to get a piece of this consistent and growing firm.
The 25-day quiet period on underwriter research related to Century Communities, Inc. that began with the firm's June 17 IPO will conclude on July 12, allowing the IPO underwriters to publish research reports on the homebuilder and residential developer on July 13.
The underwriters' reports will likely lead to at least a temporary increase in CCS share prices, often starting two days before and petering out two days after the expiration.
CCS's IPO priced at the low end of the expected range at $23 per share, and lost ground on its first day with a 7.6% loss. The stock declined to close at $20.74 per share on June 23, but has since reversed its fortunes, climbing to close at $22.99 per share on July 3rd.
CCS's IPO underwriters, including Deutsche Bank Securities Inc; J.P. Morgan Securities LLC; FBR Capital Markets & Co; Zelman Partners LLC; and Builder Advisor Group, LLC will attempt to build off the stock's recent growth through the release of positive reports on the firm with the conclusion of the quiet period.
Evidence That Quiet Period Expirations Can Open Buying Opportunities
The Journal of Finance (VOL. LVIII, NO. 1; 2003) explains that share prices typically begin to increase days before the quiet period has expired as investors anticipate positive publishings on the part of underwriter analysts and begin to buy up shares.
Lead author Dan Bradley, PhD, CFA, of the University of South Florida and colleagues state that analysts initiate coverage of 76% of firms at the time of the quiet period expiration, almost always with a rating of "Buy" or "Strong Buy." Bradley and his colleagues also note that firms with coverage initiated experience abnormal positive returns of 4.1% in the two days before and the two days following initiation of coverage. In cases when coverage is initiated by multiple analysts, returns have been found to rise to an even greater extent - to 6.4%.
This conclusion aligns with the work of Carter, Piwowar, and Strader (2001), who also conclude that the mean analyst rating at the expiration of the quiet period is a "Buy," and that higher ratings correlate with higher returns.
Purchases made by investors in anticipation of the quiet period expiration generate an atmosphere of increased demand, causing share prices to increase ahead of the quiet period expiration and producing a short-term buying opportunity.
Bradley et al also find a significant correlation between the reputation and quantity of IPO underwriters and increased share prices near the end of the quiet period. While CCS' underwriters vary in prestige, J.P. Morgan and Deutsche Bank stand out as influential in this regard.
The past three years of our own research have generated data that support the conclusions of the above academic publications.
CCS is a homebuilding firm centrally focused on constructing and selling single-family residences in metropolitan markets in Colorado, Texas, and Nevada.
The firm involves itself throughout the processes of homebuilding, including land acquisition and development, entitlements, and the construction, development, management, and sale of metro area residential projects. According to Builder Magazine, CCS ranked among the five fastest growing homebuilders in terms of total revenue in 2013.
As of April 1, 2014, CCS owned or controlled approximately 99 communities consisting of 10,095 lots. The firm targets development projects projected for rapid completion, with approximate periods of two to three years from the beginning of construction to the closing of the community. CCS has operated primarily in the Denver metropolitan area since its 2002 founding, having only entered markets in Texas and Nevada in 2013 and 2014, respectively.
For more details, see our previous article.
CCS faces competition from other homebuilders for land acquisitions, materials, financing, personnel, and customers; as the barriers to entry in the homebuilding industry are relatively low, the firm expects to face consistent competition.
Major competitors include builders like Toll Brothers (NYSE:TOL), D.R. Horton (NYSE:DHI), KB Home (NYSE:KBH), and Richmond American Homes. Some competitors will have significant advantages over CCS in its newer Nevada and Texas markets, where the firm does not have the established relationships that it benefits from in Colorado.
A Management Duo
Co-CEOs Dale Francescon and Robert Francescon have jointly managed CCS since the firm's 2002 founding. The pair also previously served as co-division presidents for D.R. Horton and owned and operated Trimark Communities before it was purchased by D.R. Horton.
Dale Francescon received a B.S. in Business Administration from the University of Southern California and a J.D. from Loyola University School of Law; he is a licensed real estate broker in Colorado and a licensed attorney and CPA in California. Robert Francescon received a B.S. in Business Administration from the University of Southern California.
Conclusion: As CCS Recovers, Buying Opportunity Appears
CCS appears to be recovering from its weak market debut, which was likely at least in part the result of residual investor concerns from the collapse of the housing bubble (though CCS maintained profitability through the collapse).
The firm has posted a profit in every quarter since its founding, and its Co-CEOs are highly experienced in the industry in general and in the Colorado homebuilding market in particular.
Though CCS lacks the scale of some of its larger competitors, it has proven more than competent to stay competitive in its Colorado base, and its expansion into new markets is also promising.
While the underwriters as a group range in prestige, the power and influence of J.P. Morgan in particular could give CCS a boost after July 12.
The upcoming quiet period expiration represents a fresh opportunity for investors to get a piece of this consistent and growing firm.
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