In a previous article, about nine months ago, I detailed the reasons why I believed Green Brick Partners (NYSE:GRBK) presented an excellent investment opportunity, being a high-quality, promising small-cap homebuilder trading at a discount. Since then, Green Brick's stock has seen a 26% price growth beating the S&P 500's 22.5% growth. My original optimism about the company today is reinforced, and in this article, I will discuss Green Brick's current position and trajectory, including updates regarding the company's financial performance and operations.
For the trailing 3-year period, Green Brick's stock has performed well, beating both the market and the SPDR Homebuilders ETF (XHB), which is commonly used as a benchmark for industry performance. Higher returns in an expanding market however should not come as a surprise for a growing small-cap stock that carries more risk overall. In fact, the fundamentals that will be discussed in the next segments rather than the stock charts are what make this particular stock exciting for investors. Normalized stock price percentage change, dating three years back, can be shown in the graph below.
A deeper dive into Q3 results and earnings call transcripts will reveal a company that achieves industry-leading performance numbers while maintaining a strong balance sheet. For the third quarter of 2021, the company reported Net income of $48.5 million, a record for any third quarter and up nearly 40% from the prior year. Revenue for the last twelve months grew at a CAGR of 27.4% compared to 2020 revenue and reached $1.2B. Year-to-date return on Equity reached an impressive 24% compared to 20% for the same period in 2020, leading the homebuilding industry. What is even more heartwarming for investors, however, is the fact that Green Brick continues to grow gross margins that already stood higher above almost all competitors. Gross margins for Q3 2021 stood at 26.9%, with SG&A Expenses actually decreasing as a percentage of Total Revenue.
For a few years now, the essence of Green Brick's strategy has been geographic placement in expanding Real Estate markets. DFW remains the company's main focus for operations with the Atlanta Metropolitan area following. Both hold record low unemployment rates among metro areas in the U.S at 4.7% and 3.1% unemployment respectively. What is perhaps even more important for a real estate market is population growth. All four states where Green brick operates (Texas, Georgia, Florida and Colorado) have seen double-digit population growth over the past decade that is expected to raise housing demand in the long term.
Q3 Investor Presentation
In an excellent and very thorough analysis, that I would definitely recommend going over, written about a month ago on Seeking alpha, author Money Investor detailed a very interesting aspect regarding the company's strategy. One of Green Brick's main objectives is to own land. Currently, the company owns or controls over 24,000 lots, a massive increase from a couple of years ago when lots owned or controlled amounted to about 10,000. Owning a large number of lots at fixed prices while the housing boom drives home prices -and subsequently land prices- up means that Green Brick can maintain strong profit margins by controlling a significant portion of the home-building cost. With this strategy the company can combat -to some degree at least- the threat of rising costs that many analysts point out will face the industry. Even if Green Brick doubles home closings in 2022, the company would still have 2-3 years' worth of land supply.
Green Brick's CEO Jim Brickman also talks about this during the earnings call.
After we saw the huge upward shift in demand in June 2020, our land teams did a fantastic job of quickly pivoting to acquire well-located land. As a result, during the last 12 months, our lot position grew over 100% to 24,354 owned and controlled lots. These lots will contribute to us growing significantly in the future – in our future earnings.
On top of what appears to be a very intelligent geographic positioning and operating strategy, the company continues to employ low leverage compared to the competition while the experience and efficiency that the firm's management brings to the table constitute necessary ingredients for future success.
By most value metrics Green Brick's stock is selling at a discount. In a market though that is currently nothing but cheap, this does not make a lot of sense, even though it is important to note that the home construction industry generally carries lower valuation multiples. The stock trades very close to its 3-years average P/E ratio of 8.10x and well below the 5-year average of 10.3x. Price/Sales and Price/Book Value metrics also point to an inexpensive investment. Valuation metrics for the trailing 3-year period are shown in the chart below.
Currently, Green Brick sits at a $1.3B Market cap. With a 1.32B Revenue Estimate for 2020 the stock trades at a 1.0x Forward P/S. Applying the same multiple at the end of 2023, where the company is expected to bring in roughly $1.7B in revenue we will arrive at a $1.7B valuation, implying a 30% upside. That is only if current low valuation multiples persist and Green Brick does not beat top-line estimates, which it has in most of its past quarters. It is my belief that over the next couple of years Green Brick will be valued at more generous multiples offering investors great upside potential.
Today, I believe that you could make an even better case for investing in Green Brick Partners than you could a year ago. With a solid business model and strategy, improving margins, fast-growing Revenue and Net income and a very healthy balance sheet the potential seems ample. Green brick was even awarded the 19th ranking number on Fortune's fastest-growing companies list in 2021. This represents a 36 spot jump from last year's positioning and in a world full of innovating tech companies I would call the achievement impressive. In my view, Green Brick represents a great investment opportunity and I will continue to add to my long position given current valuations.
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Disclosure: I/we have a beneficial long position in the shares of GRBK either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.