* All data are as of the close of Monday, December 22, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
Browsing through the list of publicly traded corporations in the Real Estate Development industry you will need to scroll past dozens of larger foreign domiciled companies before ever getting to the first U.S.-based ones.
How far down the list are they? In order of market cap from largest to smallest, our three amigos are ranked 76th, 107th and 110th. The first 75 larger publicly listed companies in the space are all foreign based, primarily in Asia, where construction had been extremely hot for nearly two decades until just recently.
But having to scroll down so far just to reach the first U.S. companies in the space is not the end of the oddity, as the largest three U.S. names in the space are actual names of persons: The Howard Hughes Corporation (NYSE: HHC), Alexander & Baldwin, Inc. (NYSE: ALEX), and The St. Joe Company (NYSE: JOE).
Let us now meet our three contestants: Howard, Alex and Joe. Glad you could play the game, gentlemen. Tell the audience a bit about yourselves.
• The Howard Hughes Corporation, domiciled in Dallas, Texas, owns, develops, and manages commercial, residential, and mixed-use real estate properties in the United States. It develops and sells residential homes ranging from entry-level to luxury homes, as well as commercial land for retail, office, resort, and services, including those designated for use by government, schools, and not-for-profit entities. It also owns and manages mixed-use and retail properties, office properties, a multi-family apartment building, a resort and conference center, a 36-hole golf and country club, equity investments, and other assets.
• Alexander & Baldwin, Inc., domiciled in Honolulu, Hawaii, provides real estate development and leasing services, and is engaged in the stewardship, planning, entitlement, development, and sale of land including commercial and residential properties, principally in Hawaii. It also owns, operates, and manages retail, office, and industrial properties in Hawaii and in the continental U.S. The company also mines, processes, and sells basalt aggregate, imports sand and aggregates for sale and use, imports and markets liquid asphalt, manufactures and markets asphaltic concrete, manufactures and supplies precast/prestressed concrete products, provides various traffic-control-related products and services, and performs asphalt paving as prime contractor and subcontractor. Additionally, the company produces bulk raw sugar, specialty food grade sugars, and molasses, as well as providing general trucking services, and mobile equipment maintenance and repair services. It even generates and sells electricity.
• The St. Joe Company, domiciled in Water Sound, Florida, operates as a real estate development company in Florida, and is engaged in the planning and development of mixed-use resorts, as well as primary and seasonal residential communities. It plans, develops and manages properties for retail, office, hotel, and industrial uses, including large and small-scale commerce parks, and multi-family rental projects. It also owns and operates inns, golf courses, and marinas, and leases retail and commercial properties. Additionally, the company grows, harvests, and sells sawtimber, wood fiber, and forest products, developing lands for rural recreational, conservation, and timberland uses.
Before beginning today's match-up let's recap Howard's, Alex's and Joe's progress during the economic recovery so far. As you may know, since the economic recovery began in early 2009, the construction sector has expanded rapidly, especially in housing after one of the severest property busts in U.S. history.
After hitting a multi-decade low of just 500,000 annual building permits in early 2009, construction projects in the U.S. gradually increased until they more than doubled by today, reaching just over 1 million annually.
We would thus expect the Real Estate Development industry to fair quite well in such an environment. Except that we need to remember one very important thing about the space: real estate development companies are primarily classified as financial companies, not construction companies. Howard, Alex and Joe are hybrids of sorts; financial stocks engaged in the construction sector.
Despite having everything going for them, such as the lowest interest rates in U.S. history and a construction boom surging all around, only one of our three contestants - Howard [beige] - has been able to beat the broader market S&P 500 [black] during its lifetime as a public company. The others - Alex [purple] and Joe [orange] (who has been in the game the longest) - have flatlined for the better part of the recovery, as graphed below.
To plot all three companies on a more synchronized graph of all three public trading histories, we need to begin in June of 2012, as graphed below. Since then, where the S&P index has gained 62% and the SPDR Financial Sector ETF (NYSE: XLF) [blue] has gained 84%, again only Howard has managed to outperform the benchmarks, growing 129%, while Alex has risen 52% and Joe has gained only 20%.
On an annualized basis since June of 2012, where the S&P has averaged 24.80% and the XLF has averaged 33.60%, Howard has averaged a warm and cozy 51.60%, while Alex and Joe have averaged a damp 20.80% and 8.00% respectively per year.
Looking forward, the Real Estate Development industry's earnings are expected to outperform the S&P broader market for the most part, yet not by much, as tabled below where green indicates outperformance while yellow denotes underperformance.
Over the next two quarters, the industry is seen growing its earnings at some 1.46 to 1.5 times the S&P's average earnings growth rate, only to underperform by almost half in 2015.
Yet over the next five years, the industry is once again expected to outgrow the broader market, increasing its earnings at some 1.27 times the broader market's rate. Not spectacular growth, but an outperformance nonetheless.
Zooming-in a little closer, the earnings growth rates of the three largest U.S. companies in the space are expected to gyrate with wild swings, as tabled below.
Where all three companies are expected to shrink their earnings in the current quarter, with Joe shrinking the most at an astronomical 1,700%, next quarter both Alex and Joe continue to shrink while Howard finally grows - and by a rather substantial amount at that, reaching 6.72 times the broader market's growth rate.
The same is expected to continue throughout 2015, with Alex and Joe still shrinking (Alex minimally), and with Howard still growing - this time at an even greater 32.86 times the S&P's average.
Over the next five years, where Howard slows to a more sustainable 2.17 times growth rate over the broader market, Alex finally climbs out of the basement to above ground, outgrowing the market at some 1.48 times its average, while Joe also climbs out of the hole only to lay flat on the ground at 0% growth.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Alex delivered the greatest revenue growth year-over-year by a substantial degree, where Joe delivered the least, even shrinkage.
Since Joe's trailing earnings growth is not available, the metric does not factor into the comparison, though it is worth noting that Howard's earnings growth far surpassed Alex's, which was itself quite robust.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Joe operated with the widest profit and operating margins while Howard and Alex split the narrowest margins between them.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, Joe's management team delivered the greatest returns on assets and equity, where Howard's team delivered the least, even losing some equity.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Joe provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Howard's DEPS over current stock price is lowest, even negative denoting loss.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Alex's stock is cheapest relative to forward earnings and 5-year PEG. At the overpriced end of the spectrum, Joe's stock is the most overvalued relative to earnings while Howard's is the most overpriced relative to company book.
Since Joe's price to 5-year PEG is not available, the metric does not factor into the comparison, though it is worth noting that of the two remaining names, Alex's stock is more overpriced relative to PEG.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Alex offers the highest percentage of earnings over current stock price for the next two quarters and for 2015, while Joe offers it for annual 2014. At the low end of the scale, Joe offers the lowest percentages overall.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Howard offers the greatest growth in all future time periods. At the low end of the spectrum, Joe offers the slowest earnings growth throughout, most of it in significant shrinkage.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Howard's stock offers the greatest upside potential and least downside risk, while Joe's stock offers the least upside and Alex's offers the greatest downside.
It must be noted, however, that all three stocks are already trading below their low targets. While this may mean increased potential for sharp moves upward, it may warrant reassessments of future expectations.
It must also be noted that Joe has only one broker making a prognostication, potentially limiting the targets' accuracy.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Howard is best recommended with 1 strong buy and 1 buy representing a combined 100% of its 2 analysts, followed by Alex with 3 strong buy and 2 buy ratings representing 83.33% of its 6 analysts, and lastly by Joe with 0 strong buy and 0 buy recommendations representing 0% of its 1 analyst.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Alex with a very narrow hedge, outperforming in 8 metrics and underperforming in 7 for a net score of +1, followed close behind by Howard, outperforming in 10 metrics and underperforming in 10 for a net score of 0, who is in turn closely followed by Joe, outperforming in 12 metrics and underperforming in 13 for a net score of -1.
Where the Real Estate Development industry is expected to outperform the S&P broader market moderately this and next quarters, underperform notably in 2015, and outperform modestly beyond, the three largest U.S. companies in the space are expected to grow their earnings in very stark contrast to one another - with Howard growing the most consistently, Joe shrinking the most consistently, and Alex ultimately swinging from shrinkage to growth.
Yet after taking all company fundamentals into account, Alexander & Baldwin, Inc. constructs the sounder financials, given its lowest stock price to forward earnings and company book, highest trailing revenue growth, highest future earnings over current stock price overall, largest dividend, and most strong buy analyst recommendations - narrowly winning the Real Estate Development industry competition.