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Home Building IndustrySector: Real Estate
Senior Analyst: Kento Okamoto
Industry Summary
Jan-
00
Sep-
00
May
-01
Jan-
02
Sep-
02
May
-03
Jan-
04
Sep-
04
May
-05
Jan-
06
Sep-
06
May
-07
Jan-
08
Sep-
08
May
-09
Jan-
10
Sep-
10
May
-11
Jan-
120.00
50.00
100.00
150.00
200.00
250.00Case-Shiller Index 20-city composite
Rating Neutral/OverweightUpside Potential• Indication of modest
recovery• Potentially undervalued
due to skepticismDownside Risk
• Possibility of another economic disaster
• High elasticity due to uncertainty
Industry Revenue ($MM)
20002001200220032004200520062007200820092010201120120
100,000
200,000
300,000
400,000
500,000
600,000
-40
-30
-20
-10
0
10
20
Growth % Revenue $ millionAction StatementHousing market seems to be on its path for recovery with mixed factors that can potentially shift the market outcome in different directions. Some major factors are:
Signs of recovery in residential home price Housing price increased for the first time since Sep-2010. Some
concrete signs of modest recovery.
30 year mortgage interest rate at all time low Golden opportunity for financing real estate purchases. Increase in
prime mortgage to support future growth of the market.
Subliminal risk of high demand elasticity Still concerned market may over-react to negative market news.
Industry Definition – House Construction
• Firms in this industry are primarily engaged in construction and remodeling of single-family houses and residential buildings. These firms may also hold their own financial services arm to provide clients with customized financial solution. Firms in this industry operate in multiple states, yet tend to hold strong position in their indigenous states.
NYSE: PHMNYSE: DHI NYSE: LEN
NYSE: KBH NYSE: RYL NYSE: TOL
Industry Breakdowns
East Midwest South West0
2
4
6
8
10
12
14
Pulte Group D.R.Horton
Lennar Corp KBHomes Inc.
Ryland Group Toll Brothers Inc.
# o
f S
tate
s
Industry breakdown by region 5983.6
829.78
6060.065080.91
1158.3
5407.58
DHI KBH LEN PHM RYL TOL
Industry breakdown by market cap ($MM)
3637
1405
34284137
891 1476
DHI KBH LEN PHM RYL TOL
Industry breakdown by revenue ($MM)
General Business Model
Home Building
Supplier
Base Material
Material Cost Construction
Customer
Mortgage Loans
Payments + Interest + (Collateral)
Mortgage
Banking
Home Builders
LandPurchase
Economic Landscape
Home Builders
Financial Entities
New Residenc
es
Foreclosed
Properties
Housing
Market
Demand
Consumers
Financing
Collateral
“Supply Side”
“Demand Side”
Absorption of Existing Inventory
Existing Home Sales and Remaining Inventory
2004-Q1
2004-Q3
2005-Q1
2005-Q3
2006-Q1
2006-Q3
2007-Q1
2007-Q3
2008-Q1
2008-Q3
2009-Q1
2009-Q3
2010-Q1
2010-Q3
2011-Q1
2011-Q3
2012-Q1
$0
$50
$100
$150
$200
$250
$300
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
National Median Housing price HOI
What does this trend tell us?• Steady decrease in existing house
inventory • Government support to prevent
foreclosure• Recovering consumer appetite for real
estate purchase
July-1
1
Augus
t-11
Sept
embe
r-11
Octob
er-1
1
Nov
embe
r-11
Decem
ber-11
Janu
ary-
12
Febr
uary
-12
Mar
ch-1
2
April-
12
May
-12
June
-12
July-1
20
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
f(x) = − 1933.63167385967 x + 81682045.7005374R² = 0.649292534628651
f(x) = 892.905096943982 x − 32095134.8085289R² = 0.40753258897442
Inventory Linear (Inventory)
Existing Home Sales Linear (Existing Home Sales)
Projected demand surplus, leading to opportunity for new
home buildingForeclosure rate down 2.99% in June v.PY
30-yr Mortgage rate and New Home Sales
Jun-
11
Jul-1
1
Aug-1
1
Sep-
11
Oct-1
1
Nov-1
1
Dec-1
1
Jan-
12
Feb-
12
Mar
-12
Apr-1
2
May
-12
Jun-
12
0
50
100
150
200
250
300
350
400
450
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
f(x) = − 0.00199848196308534 x + 85.7410224933074R² = 0.848049128570088
East MidwestSouth West30yr Mtg. Linear (30yr Mtg.)
In 0
00’s
%
Mortgage rate movement and New home sales With low home price, what matters
to potential purchaser is the interest payment
• Current 30-yr mortgage rate down to approx. 3.5% v. 8.3% pre – 2008 crash
• Significant decrease in total interest payment for property purchases
• Signs of increasing demand in second home purchase by retired population
• Projected increase in prime mortgage, which could support the recovery of the real estate market as a whole
Golden opportunity to purchase a superior property in minimum sunk-cost
and interest payment
Future Outlook
Industry to experience organic recovery/growth• Strong projected growth in total industry revenue
and company orders • Profitability to recover with less loss from
depreciated property/options valueRisks to Consider
Sizable negative market news• As the market begins its process to
recovery, a sizable negative news on the market could scare out potential demand.
Loss of federal support or/and continuous over-regulation in lending standard
• Loss of federal lending support or overly strict lending policy could take away the golden opportunity for financing real estate purchase.
General Outlook
Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
0
100,000
200,000
300,000
400,000
500,000
600,000
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
f(x) = 0.0813392857142857 x − 0.455R² = 0.686571286715371
f(x) = − 0.006375 x + 0.211214285714286R² = 0.105497152506456
Total Industry Revenue
Median Orders (Selected)
Linear (Median Orders (Selected))
Gross Margin % (Selected)
Linear (Gross Margin % (Selected))
$MMTime-series analysis on total
revenue, orders, and profitability
Recommendation
Reiterate a Neutral/Overweight rating:
• Promising signs of modest market recovery seen in various key statistics and indicators
• Possibility of significantly outperforming the total real estate market as shortage in supply may become more imminent
• Contains subliminal risk of high demand elasticity as market confidence is still under repair Good potential for outstanding performance, yet with recognizable risk of disappointing outcome
Appendix
Company ComparableScale 1,000,000
Currency USD
Key Financials & Effectiveness
Name TickerSalesTTM
SalesYear/Year
Net MarginTTM
Net MarginFY1
EPSTTM
EPSYear/Year
ROICTTM
PULTEGROUP, INC. PHM 4,354.72 1.10 (1.95%) 3.98% (0.22) 0.07 (3.93%)
KB HOME KBH 1,404.60 0.99 (4.68%) (5.25%) (0.85) 0.39 2.05%
LENNAR CORPORATION LEN 3,427.86 1.14 14.89% 16.12% 2.42 4.40 2.59%
D.R. HORTON, INC. DHI 4,116.10 1.18 21.67% 22.26% 2.58 32.25 2.31%
THE RYLAND GROUP, INC. RYL 1,000.22 1.19 (1.93%) 2.30% (0.43) 0.24 (2.77%)
TOLL BROTHERS, INC. TOL 1,677.74 1.16 5.41% 5.92% 0.54 1.19 5.52%
Median 1,404.60 1.12 (1.93%) 3.37% (0.36) 0.43 1.98%
High 7,552.00 1.35 21.67% 22.26% 2.58 32.25 5.52%
Low 921.66 0.99 (13.38%) (5.25%) (1.67) (0.57) (3.93%)
EV Multiples & Credit Ratios Market Data & Price Multiples
Name TickerEV/Sales
TTMNet Debt/
EV Name Ticker Price52 Week
HighPrice/
Book ValuePrice/
BV Tangible
PULTEGROUP, INC. PHM 1.51 0.23 PULTEGROUP, INC. PHM 13.28 13.91 1.76 2.80
KB HOME KBH 1.45 0.59 KB HOME KBH 10.72 13.12 1.51 2.24
LENNAR CORPORATION LEN 2.79 0.32 LENNAR CORPORATION LEN 32.27 32.85 1.63 1.94
D.R. HORTON, INC. DHI 1.69 0.11 D.R. HORTON, INC. DHI 18.62 19.35 1.68 1.71
THE RYLAND GROUP, INC. RYL 1.56 0.23 THE RYLAND GROUP, INC. RYL 26.01 27.15 2.51 -
TOLL BROTHERS, INC. TOL 4.05 0.20 TOLL BROTHERS, INC. TOL 32.41 33.68 1.81 2.07
Median 1.69 0.23 Median 22.32 23.25 1.72 2.07
High 4.05 0.71 High 32.41 33.68 2.51 2.80
Low 1.01 0.11 Low 10.72 13.12 1.51 1.71
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