A N A L Y S T I N T E R V I E W O U T L O O K F O R H O M E B U I L D I N G
TWST: If we look at those
eight companies, what is their share?
The eight companies that we follow, Beazer Homes (BZH), Centex, D.R.
Horton (DHI), KB Home (KBH), Lennar,
MDC Holdings (MDC), Pulte Homes (PHM) and Toll Brothers (TOL),
have roughly 15% market share based on our calculations.
TWST: Given that, can they
continue to increase share?
We think the companies can continue to
increase market share. Available capital and capital structure are very important
components to the ability to sustain growth. All of the companies that we are
discussing today have the best balance sheets and the best liquidity they have
had in recent history. Their ability to invest capital efficiently is the key
determinant of their future success. Their ability to continue to gain market
share should be based on their capital allocation in various markets around the
we look out, what are your assumptions on the housing market for the next year
We think total unit demand in the housing
market should vary annually by some single digit percentage, perhaps between
+5% and 5%. Most of the economic projections we have seen for 2004 indicate
total home sales may be down 3%-4%, and we do not think that is an unreasonable
assumption. Within that industry framework, we think that the larger companies should
gain share and still have both positive home sales growth and positive earnings
TWST: Is that modest decline
based on higher interest rates, or just consumers being satiated?
Each individual economist has their own
factors influencing their projections. We think the economy should show growth
into 2004. That should improve consumer confidence and grow jobs, which are
important components for housing demand. Economic growth is also likely to be
associated with higher interest and higher mortgage rates, so the mortgage rate
impact may just have a bit greater drag on the market than the positive impacts
of employment and consumer confidence. This is the opposite of what weve seen for
the last two years.
you look at the companies in your universe, are they doing anything different
at this point? Are they building different types of houses or addressing different
markets than they have in the past?
In order to grow market share, the
companies are expanding on several fronts. Within existing markets, they can
gain share by increasing community count as well as expanding product lines.
With regard to product lines, the companies have an opportunity to expand their
offerings at different price points and
Joseph Sroka says the performance of
the homebuilding stocks this year has actually exceeded that of the housing
market. Companies have continued to increase market share as they expand
their operations into new markets as well as existing markets. The companies
he covers all have the best balance sheets and the best liquidity they have
ever had. Their ability to invest capital efficiently is the key determinant
of their future success. He prefers the companies that are more organic growth
focused since this is a lower risk way for the companies to grow, and there
is really not much difference in the valuation from the acquisition-oriented
Companies include: Centex (CTX); Beazer
Homes (BZH); D.R. Horton (DHI); Lennar (LEN); Pulte
Homes (PHM); Toll Brothers (TOL); KB Home (KBH); MDC Holdings (MDC).