A Look at Arnold Schneider's Large Homebuilder Positions as Positive Housing Market Data Emerges
The glimmer of hope in recent numbers such as these prompts the question of whether it’s not too early to invest in a housing recovery. One prominent investor doesn’t seem to think so. Arnold Schneider of $1.7 billion, deep value-oriented Schneider Capital Management, has two home builder stocks in his top 15 holdings. Schneider Capital has a disciplined investing approach, seeking new investment ideas, conducting rigorous research, and investing for the long term.
Schneider’s second-largest homebuilder stock is KB Homes (KBH). It is 2.2 percent of his total portfolio, but he owns 5.9 percent of the company. He owned the stock back in the second quarter of 2006, acquiring more shares until the fourth quarter 2007, when he sold out. When he bought the stock it traded about $55 per share, and when he sold out the price had fallen to about $24.50. He began acquiring more of the stock in the third quarter of 2009 at about $17 per share and has added more shares every quarter since then as the price has for the most part decreased. Most recently, in the third quarter, he bought 970,600 shares for about $7 per share. In total, he owns 4,527,480 shares.
Home builders were once highly robust businesses and KB Homes still has good points. Its revenue has been in decline since 2006, dipping from $1.8 billion in 2009 to $1.6 billion in 2010. To see more of KB’s financials, go here.
The company recently saw other improvements. In the fourth quarter, it had its highest year-end backlog since 2008 at a 61% increase, which should help stabilize deliveries and increase margins, as well as a 38% year-over-year increase in net orders. New home deliveries increased to 1,995 from 1,918 in the fourth quarter of 2010, going into 2012 with its first year-over-year increase in 2011.
Some KB’s customers faced difficulty obtaining mortgages in the fraught underwriting environment, primarily due to issues relating to its new non-exclusive marketing agreement with MetLife Home Loans which began on July 1. The transition caused a delay in the closing of many homes until the first quarter of 2012. Nonetheless, KB posted a profit for the fourth quarter, which it had not done for a year.
“Now that we have established the sales pace and backlog that will allow us to fully reap the benefits of our Built to Order business model, we believe we have laid the foundation for improved financial and operating performance in the new fiscal year. In addition to delivering more homes at higher prices, we expect that operating margins will improve in 2012 on a year-over-year basis starting in the first quarter and will be positive for the year as we execute our Built to Order model,” Jeffrey Mezger, KB Homes’ CEO, said on their fourth-quarter earnings call.
Schneider’s largest home builder, NVR Inc. (NVR), is really a home builder and mortgage banker. It is 3.4% of his portfolio and his sixth largest holding in general. He originated his position in the fourth quarter of 2007 with 63,405 shares at about $484 per share. After numerous buys and sells, he bought 10,789 shares in the second quarter of 2011 at about $734 per share, and 1,407 shares in the third quarter at about $653 per share. He owns 65,778 shares total.
David Einhorn is also an investor in NVR, owning 2.57% of shares outstanding. He has been adding to his holding each quarter since he initiated it in the first quarter 2010.
NVR Inc. is a holding company that operates in two business segments; the construction and marketing of homes and in financial services. NVR's homebuilding operations construct and sell single-family detached homes, townhomes and condominium buildings in two distinct product lines through the two divisions known as Ryan Homes and NVHomes. NVR's also provides financial services including a mortgage banking operation. NVR's mortgage banking business generates revenues primarily from origination fees, servicing fees, gains on marketing of loans, title fees, and sales of servicing rights.
NVR boasts the highest operating margin in the home building industry at 9.8%, and the highest free cash flow per share of $8.22. The company’s revenue declined from 2006 to 2010, but it increased from $2.8 billion in 2009 to $3.1 billion in 2010. Earnings have also improved each year from 2008 to 2010. NVR has almost $700 million in cash, $73 million in long-term liabilities, and no long-term debt. To see more of NVR’s yearly financials, go here.
In the most recent quarter, the company saw homebuilding revenues increase 5% from the third quarter of 2010 as a result of a 6% year-over-year increase in the number of units settled. New orders increased 3% year-over-year, while the average selling price for new orders remained flat. Revenues from its Homebuilding Mid East segment were the only to see a year-over-year decrease, while all other regions posted revenue increases. For the nine months ended Sept. 30, 2011, all segments — the Homebuilding Mid Atlantic, Homebuilding North East, Homebuilding Mid East, Homebuilding South East and Mortgage Banking — have shown decreased revenues from the same year last year.
The valuation of NVR seems rather high for a value investor. It currently has a P/E of 24.8, though when Schneider first bought the stock, in the fourth quarter of 2007, it was much lower, at 6%. The same is true for the P/B ratio, which was a hair’s breadth from a historical low in the third quarter at .47, and now stands at 1.1.
To see Arnold Schneider’s complete portfolio, go here.
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