The company:
Standard Pacific Corp (SPF) is engaged in the business of constructing single-family attached and detached homes with operations in the metropolitan markets in California, Florida, Arizona, Texas, the Carolinas and Colorado. The Company builds homes in 25 markets through its 15 operating divisions. Its homes sizes typically range from approximately 1,500 to 3,500 square feet, although it has built homes from 1,100 to over 6,000 square feet. At December 31, 2013, the Company owned or controlled 34,175 home sites (including joint ventures) and had 180 active selling communities.
The company has a profitability and growth rated 4 out of 10, with positive returns (ROE of 12.94%, ROA of 5.36% and ROC of 11.22%) that are ranked higher than 65% of other companies in the Global Residential Construction industry. The financial situation is rated 6 out of 10 by GuruFocus, with a cash to debt ratio of 0.05, which is lower than SPF's 1.03.
The stock is now trading with a (almost) cheap P/E(ttm) ratio of 17.10 and during the last year, the price of the stock rose by 5% (140% over the last 5 years).
During the last quarter (Q1 of 2015) the company has been traded four times: Ken Heebner (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) sold out their shares while Chuck Royce (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) increased their stakes by 10.21% and 14.81%.
The News
Last week, the investment bank Credit Suisse (CS) downgraded from “outperform” to “neutral” saying that it recognizes the "strategic reasoning" behind Standard Pacific's acquisition of Ryland (RYL)Â and they believe that integration risk in combination with a relatively full valuation based on their initial pro-forma projections for earnings and book value create a less favorable risk/reward profile. The merger of the companies will make the fourth largest homebuilding company in the U.S and the combined company will have an equity market capitalization of about $5.2 billion and an enterprise value of about $8.2 billion.
Standard Pacific which is engaged in the development of single-family and multi-family homes is currently covered by 10 Wall Street analysts and compared to other peers in the Residential Construction sector, SPF has outperformed in terms of quarterly revenue growth year over year at 0.02 vs. the industry average of -0.25. Standard Pacific’s earnings per share is currently at .52, which is below then the sector average of 0.75.
The current quarter EPS consensus estimate is 0.15 with revenue estimates of $694.92M. Sales are expected to grow at a 16.10% rate. Standard Pacific reported actual earnings last quarter of 0.08 failing to beat the .10 consensus estimate by 20%..
At the end of the quarter they could be owned or controlled nearly all of their expected average selling communities for 2016 in over 85% of the expected 2017 .
Order absorption rate was up 5% and net orders increased 20% over the prior year. The change in ASP is heavily mix dependent and reflects real pricing power and the impact of community mix.
With the solid improvement in their backlog gross margin, 2015 is setting up to be another year of solid growth and performance for the company.
They had highest first quarter in backlog since the first quarter of 2006 by backlog value up 29%.
About the future
They will continue to find opportunities that meet their underwriting criteria. Considering their current land position, the operating teams are focused on acquiring land that will result in new community openings in the first half of 2017 and beyond.
The gross margin backlog expected to close in the second quarter is 24.2%. The homes sold and closed in the second quarter will impact the reported results up or down from the backlog figures.
As homes are delivered from their new communities, they anticipate that their SG&A leverage will be realized over the remainder of 2015. Insurance should remain variable at about 1% of revenue and incentive compensation is expected to remain at about 1% of revenue.
Conclusion
The acquisition of Ryland will build a big homebuilding colossus of companies that are financially and economically healthy. Although Credit Suisse doesn’t agree, investors saw this M&A as positive and both shares’ price are having a good momentum that started when the news was published.
