Can You Judge a Homebuilder By Its Book Value?

Monday, July 09, 2007 | 06:56 AM

There is a fascinating article in today's WSJ about a contentious valuation debate: Homebuilders judged by their book value.

What makes this intriguing is the combination of players in the space: The Homebuilders are loved/hated by an odd amalgam of value investors, technicians and short sellers.

Over the past year, I have been amazed that every bounce and short squeeze after a major drop has been declared proof of a bottom in Housing. With the biggest problem in the residential homebuilding sector being the enormous competition from the huge overhang of inventory for sale, I suspect the Homebuilders have a ways to go before they are attractive again.

Meanwhile, as this debate plays out, the ISE Homebuilders Index made a new multi-year low on the weekly charts:

ISE Homebuilders Index


Here's an excerpt from today's Journal:

"A year ago, home-building companies looked like bargains. Looks can be deceiving. Many companies were trading near book value -- a rough estimation of what they would be worth in liquidation and typically a green light to investors to buy the stocks. Turns out it was a faulty signal, and one that is flashing to hopeful investors again.

Value-seeking investors bought into the sector, and the builders' stocks surged toward the end of last year. But the subprime debacle and a rising supply of unsold homes have sent home-builder shares plummeting, erasing most of their gains.

So, this time around, investors may be gun shy about following the old rule of thumb of buying the home builders at book value and selling after the shares have appreciated to at least twice book value.

The problem is that book value is more of a moving target than a sure sign of a bargain. Book value is a company's assets minus its liabilities. Typically for builders, their largest asset is land, which in some cases, amid falling home prices, is no longer worth what they paid for it. That has forced builders to write down the land on their books. Meantime, the builders are still paying down the debt that they used to buy much of the land.

At the end of June, for instance, home builders were trading at 1.1 times book, with some large companies, such as Beazer Homes USA (BZH) and Hovnanian Enterprises (HOV), going as low a multiple as 0.6, or 60% of book value, according to Morgan Stanley."

Fascinating stuff . . .

Can you judge a Homebuilder by its Cover?

chart courtesy of WSJ


Rule of Thumb Hammered
Judging Home Builders By Book Value Can Sting As Write-Downs Mount
WSJ, July 9, 2007; Page C1

Monday, July 09, 2007 | 06:56 AM | Permalink | Comments (19) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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It's tough to like these stocks on a margin of safety basis when they're at 1x book. We know these guys have had their moment in the sun as far as profits and asset value growth are concerned(at least until the next major housing cycle), so why would I be willing to pay 1x book value for a company with falling asset prices, falling equity (hello write-offs), declining profits and too much debt? Give me a call when these things get down to 0.6x book value and we have a few corporate bankruptcies.

Posted by: lloyd | Jul 9, 2007 8:17:19 AM

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