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Sheldon Shi
Sheldon Shi

Home Building Not Yet Bottomed

July 19, 2006

The slump in the Residential Construction industry is almost a year. Has it found bottom? Not if there is still air in the housing price. In many of the previously “hot” real estate market, it seems the housing prices still have room to settle. In my neck of the woods, the home builders are slashing prices left and right to make the inventory moving. Some of them that offered 1% referral commission a year ago, 3% six months ago, are offering 5% referral now. Scary, isn’t it? New home prices usually come down faster than existing home prices, because home builders do not have the same attachment to new homes as homeowners to their existing homes. Existing home prices in my area did not buckle much yet. But sooner or later I believe they will, when many of the buyers who teased by low interest rates over-stretched themselves a year or two ago end their honeymoon with their adjustable rate interests-only home loans, and when it finally settles into people’s mind that home prices are not going to go up any time soon. Although home builders are selling cheap now, based on their trailing earnings, are they cheap enough?

In this market, it is not hard to find quality stocks at low PE multiples and high yields. Intel, for example, has a PE of 14 and yield of 2.1%. Pfizer has a PE of 15 and a yield of 4.1%. None of these stocks suffer the plight of home builders, whose forward earnings are in question and whose dividend yields are unattractive at 1% to 2%. To really make investors’ risk taking-worthwhile, their yields have to be at least double the current level. That spike cannot come out of increased paid out ratios as these companies can only be in worse shapes down the road. It has to come out of lowered stock prices, which leaves those stock prices with 50% rooms to spare.

Ticker Name Predictability Ranking 5-Yr Earning Growth Return On Capital PE Dividend Yield Market Cap ($M)
NVR NVR Inc. 16.75% 71.16% 3.81 2720
TOL Toll Brothers Inc. 20.92% 18.95% 4.61 3970
MTH Meritage Homes Corp. 22.00% 16.60% 4.73 1210
RYL Ryland Group Inc. 18.28% 19.45% 4.08 1.1% 1940
MDC MDC Holdings Inc. 19.60% 17.15% 4.53 1.9% 2340
BZH Beazer Homes USA Inc. 17.99% 7.23% 6.33 0.9% 1790
HOV Hovnanian Enterprises Inc. 22.26% 14.25% 3.77 1790
LEN Lennar Corp. 18.08% 11.69% 5.00 1.4% 7110
PHM Pulte Homes Inc. 21.51% 15.59% 4.84 0.6% 7440
DHI DR Horton Inc. 22.26% 14.31% 4.67 1.7% 7470
TOA Technical Olympic USA Inc. 22.83% 22.47% 3.36 0.4% 832
KBH KB Home 19.51% 15.84% 4.07 2.2% 3640
SPF Standard Pacific Corp. 20.92% 13.00% 3.68 0.6% 1670
MHO M/I Homes Inc. 11.32% 9.02% 4.81 0.3% 484
AVTR Avatar Holdings Inc. 27.29% 12.37% 6.49 478
LR Lafarge SA 17.84% 7.24% 1.8% 21140
OHB Orleans Homebuilders Inc. 21.15% 8.68% 4.60 0.5% 287
WLS William Lyon Homes 21.71% 17.50%

About the author:

Sheldon Shi
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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