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Banker or Broker -- which is better for your mortgage?
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Remember that a companies profit comes from you pocket

(higher price is not equal to improved quality!)

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?

Mr. Sroka: 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?

Mr. Sroka: 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 country.


TWST: As we look out, what are your assumptions on the housing market for the next year or two?

Mr. Sroka: 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 growth.


TWST: Is that modest decline based on higher interest rates, or just consumers being satiated?

Mr. Sroka: 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 we’ve seen for the last two years.


TWST: As 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?

Mr. Sroka: 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.


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).






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