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Look at the happy newlyweds, Tony and Carmella. All snug as a bug in their garden apartment. They lie in bed, cuddled in wedded bliss, smiling staring at their ceiling. Then, all of sudden, they hear their 400 lb upstairs neighbor get out of bed and traipse across the floor to relieve himself of about 30 of the beers he just consumed that evening. Tony and Carmella watch the plaster fall from their ceiling with each heavy footprint.
“Tony, when are we going to get our own house? Angie has her own house and her husband disappeared.”
“As soon as the economy gets better, I’ll be able to earn more and buy one of those new houses.”
“But Tony, if the economy gets better, interest rates will go up and houses will be harder to afford for the average person.”
“Don’t you listen to nuttin I tell you?? If the economy gets better, I’ll be earning more and besides absolute interest rates are still gonna be low, even if they go up. I’ll still be able to get you a nice house. Besides, that Greenspan doesn’t have the balls to raise rates again. Last time he did, the stock market went to crap. He won’t do that again in an election year.”
“Oh Tony, you’re so smart. No wonder you’re the boss.”
“Now if I could only pick stocks like $$$MR. MARKET$$$, I wouldn’t have to work so hard.”
The epilogue to this story is that Tony picked high flying internet stocks with no earnings and lost all of his money. He did find another line of work, however, and eventually bought a big house in the New Jersey suburbs.
Today I bought Standard Pacific (SPF) at 52.27 (that’s right, I finally bought one on a dip). I will sell it in 4 to 6 weeks at 60.35. Here’s why I like SPF:
Don’t say it. I know you are thinking it. “$$$MR. MARKET$$$!! Are you smoking crack?? Another homebuilder???.” With a shortage of desirable land, difficult regulatory processes, favorable demographic trends, economies of scale and numerous acquisition opportunities, homebuilders will continue to show robust growth for many years to come. Yes, interest rates may move higher, but this is likely to occur only if the economy and employment gather steam--not exactly a negative for the industry! You've got companies earning 18 to 20 percent return on equity. They're getting market share from their competitors, and they're selling at roughly nine times earnings. Hello? While the average top home builder share is selling at a price-to-expected 2004 earnings ratio of 8.8 percent, the average S&P 500 stock trades at 17.8.
SPF stock is up over 100% in the last 12 months. Yet it’s PE is only 9.3. 9.3??!! It’s almost impossible to lose money on this investment. I tell you, these homebuilders just get no respect. All they do is make money. The 12 month r^2 value is 0.90. For all of the fear and doubt about the economy and the clever balancing act between economic growth and fear of inflation and interest rate hikes, this stock just keeps steadily climbing in price. Look at its chart:
SPF has grown its revenues by 25% per year over the last 5 years while growing their earnings by 34% per year over the last 5 years. Their annual earnings, revenues and total cash flow have grown each and every year for the last 7 years. No hiccups…even through a very bad economic period.
Standard Pacific is one of the nation's largest and most successful homebuilding companies with shares traded on the New York Stock Exchange. They have created more than 60,000 homes in California, Texas, Arizona, Colorado, Florida and North Carolina over the past four decades. Home ownership is a cherished American tradition. . The Company constructs homes within a wide range of price and size targeting a broad range of homebuyers. Standard Pacific operates in some of the strongest housing markets in the country. It's the 11th-largest home builder in the country and ranks No. 5 in California. In Florida, it ranks second in Tampa and fifth in Miami. While Standard Pacific might not be everywhere, the markets it's in are strong ones. SPF is currently in five of the six top growth states in the country. These states produce 43% of all the new housing in the country.
SPF is in a very favorable industry. In the past decade there has been tremendous growth in housing. Also, SPF is very diversified around the core homebuilding operation. They have a pretty sophisticated financial-services operation. Despite shares of some home builders more than doubling last year, they may still be relatively cheap compared with some other sectors of the stock market.
Standard Pacific Corp. began homebuilding operations in 1966 through its predecessors. The company's strategy involves focusing on growth in existing markets; expanding and diversifying geographically through acquisitions; targeting a broad range of homebuyers; maintaining strong land positions, often via the use of joint ventures and strategic alliances; leveraging its management team and decentralized operating structure; and operating conservatively with emphasis on control of overhead and operating expenses.
Besides low mortgage rates it is demand, which is increasingly being influenced by demographics, that has made homebuilding such a great success. Baby boomers, children of baby boomers, immigrants, and children of immigrants are all fueling demand. SPF is in an industry with rising demand through probably the next decade to 15 years. Estimates are for 1.7 million to 1.9 million annual housing starts per year over the next 10 to 15 years. For all of 2003, housing starts climbed 8.4% to 1.84 million units, the highest since 1978. Looking to 2004, the National Association of Home Builders forecasts that single-family housing starts will decline 3%, though the absolute figure will still be sky-high. The National Association of Realtors (yep, those ladies that sit around the house all day and watch Oprah) is forecasting that existing-home sales will decline 4.9% to 5.8 million units in 2004.
Home price appreciation should come down to about 5%. This won’t burst the price bubble. Housing continues to boom because interest rates are still at historic lows and we have a supply problem, not a demand problem. Speaking of interest rates, the 30 YEAR TREASURY YIELD INDEX is still only 5.2%.
Inevitably, mortgage rates will begin to rise. However, during the last two periods of rising rates -- 1999 to 2001 -- there were seven quarters of interest rate increases that amounted to 180 basis points. And last year, starting in July through October, there was a 120-basis-point rise in mortgage rates. In both periods, SPF was able to increase their business. More importantly, for the stock price, it took 3 consecutive quarters of negative earnings vs. the previous year (12/01, 3/02 and 6/02) before the stock price even started to decline. During this period of declining year on year earnings from Jan 1, 2002 to June 30, 2002, the stock actually INCREASED in price by about 40%. The low P/E cushion is a tremendous insurance certificate against losing money when buying this stock. In addition, SPF came through the recession in California in the early '90s in pretty good shape relative to the rest of the world. Since they are more of a conservative company, they don't get overextended.
It’s more than mortgage rates that affect the home-buying decisions. It's a lifestyle choice. It's the need to move into a house rather than into an apartment. And there's a lot of flexibility in the home buying. For example, if a buyer was looking at a $200,000 house and rates start to rise, he or she then might look at buying a $180,000 house instead. About 25% of Standard Pacific's housing stock is oriented to first-time buyers. One-third targets move-up buyers. Their buyer profile is typically a growing family. They might be in their low 30s and into their mid-40s, and often they're moving up to a pricier home. There are broader demographic themes that will support growing bottom lines for homebuilders, such as continued immigration into the United States, a shortage of land available for building, and the market share that big builders, like SPF, continue to steal from the "mom and pop" outfits.
Furthermore, the industry will continue to have pricing power. . It should also be noted that sales of single-family homes soared 11.5% for all of 2003 to a record level of 1.085 million homes. The main reason is because the supply of land that's available for home construction in the U.S. remains constrained because of entitlement issues. That keeps pressure on prices. Because of the imbalance between supply and demand, SPF will have increasing pricing power. Standard Pacific’s performance over the next five years will be as good or better than the last five years. Demand will likely taper off some when interest rates eventually rise but that will be more than offset by a lack of land supply. Standard Pacific is in a stronger position than some home builders because of its presence in strong housing markets.
Let’s talk value, shall we? If we assume initial earnings of $204 million grow at a rate of 13.40%, and we discount those future earnings at a rate of 15.00%, we arrive at a net present value for the company's next 10 years of earnings of $1.89 billion. To account for potential earnings beyond the 10th year, we estimate a growth rate of 6.00%, a discount rate of 12.00%, and we arrive at a continuing value of $3.14 billion. To complete the calculation we add these two figures together, subtract the long-term debt for SPF ($1.06 billion), and divide by the outstanding shares (34.0 million) to get a per share intrinsic value of $117.14.
Standard Pacific's 2003 revenue increased 25% from the prior year to $2.4 billion. Earnings shot up 58% to $6.08 a share. First Call analysts expect earnings this year to rise 19% to $7.25. In February, SPF raised its 2004 EPS guidance to $6.90 to $7.00, from previous guidance of $6.40 to $6.50.
SPF report’s 1Q numbers on April 28, 2004. They will obliterate the $0.90 number. Last week, Standard Pacific Corp announced preliminary new home orders for the three-month period ended March 31, 2004, the highest for any first quarter in the Company's history. New home orders for the Company's 2004 first quarter continue to be strong in the Company's three largest markets. In Southern California, orders were up 5% year-over. In Northern California, new home orders were up 125% on a 63% increase in active selling communities, reflecting stronger housing market conditions in the Bay area compared to last year. In Florida, orders were up 28% In Arizona, for the first quarter, orders were up 13% year-over-year despite a 5% decline in the number of active selling communities..
Let’s take SPF’s 2004 guidance of $7.00/share, which they always beat, and which is even lower than the ANALysts guidance of $7.25/share. If you take $7.00 and multiply it by the ridiculously low P/E of 9.3, you get a share price of $65.10, which is well past my sell target. I love making money on safe stocks. (By the way, $$$MR. MARKET$$$ predicts 2004 earnings of $7.53/share.) Geez, SPF only trades at 1.76 times its book value. SPF also pays a dividend. Return on Assets is 9.6%, Return on Equity is 22.6%. This is a well run company, no doubt.
The homebuilding industry has changed. The top players, are no longer rate sensitive and Wall Street has not woke up to the fact. The big companies are going to grow 5 percent faster than the industry. They make good cash flow, and they don't do dumb stuff with it. Wall Street has played it simply as an interest rate play and that's not the reason for you to own the stocks,
SPF directors love their own stock. In January 2003, directors increased the aggregate authorized limit for an April 2001 stock repurchase plan to $75 million, from $50 million. This shows confidence in their own cash flow projections. As of February 2003, SPF had bought back $34.4 million of stock under the plan, leaving about $40.6 million available for future purchases.
Here’s what the boss thinks:
Stephen J. Scarborough, Chairman and Chief Executive Officer, stated, "Our record operating results for the 2003 fourth quarter cap another tremendous year of top line and bottom line growth reflecting the continued strength of the homebuilding industry and Standard Pacific's growing position in some of the largest and most dynamic markets in the country.
"The Company's record of revenue and earnings growth is the result of our balanced strategy of expanding in our existing markets as well as into new geographic markets with long-term growth potential. Building on our success in 2003, we expect to see opportunities for continued growth this year with deliveries projected to increase in all three of our operating regions -- the West, Southwest and Southeast."
"We are also pleased with the progress we have made with respect to improvements in our homebuilding gross margin percentage, which was up 330 bp's year-over-year to 22.8%, and in our return on average stockholders' equity, which was 22.6% for the year ended December 31, 2003. These positive results reflect a growing emphasis in our organization on achieving strong shareholder returns while continuing to conservatively manage our balance sheet."
"As a result of our strong finish in 2003, which generated record order levels and backlog, we are raising our 2004 earnings' guidance for the full year to between $6.90 and $7.00 per share, up from our previous guidance of $6.40 to $6.50 per share. This would represent up to a 15% increase over our full year 2003 per share earnings. The updated guidance for 2004 reflects the impact of the one million new shares of common stock issued in December of 2003 to fund our growth initiatives. For 2004 we are targeting 9,300 deliveries, excluding 300 joint venture new homes, and homebuilding revenues of approximately $3.2 billion. To support our 17% increase in projected deliveries this year, we are planning to open between 100 and 110 new communities, up approximately 30% year-over-year. As a result of the seasonal nature of our business and the timing of new community openings, we expect that approximately 60% of our profits this year will be generated in the second half of the year."
Mr. Scarborough added, "As we conclude yet another successful year we look ahead to a bright future for our Company. We are encouraged by the underlying dynamics in the industry including prospects for long-term household growth driven by immigrant inflows and an aging population. We believe that these positive demographic trends and the growing constraints on the supply of new housing, coupled with our balanced growth strategy and experienced management team, provide a solid foundation as we begin 2004 with the anticipation of another record year."
So…the question is: Does $$$MR. MARKET$$$ have one more homebuilder left in him? A very HUGE question indeed. With the US economy in the midst of a recovery, but with the rebound likely to remain controlled, interest rates should stay low. 30 year rates should stay around current historical lows (less than 6%) for the next two years and inch up a little in 2006/2007 (maybe to 7%). So through 2005, homebuilders should continue to outperform the market. Homebuilders were up 97% in 2003 vs. 27% for the S&P 500. A fast horse indeed.
“Tony, when are we going to get our own house? Angie has her own house and her husband disappeared.”
“As soon as the economy gets better, I’ll be able to earn more and buy one of those new houses.”
“But Tony, if the economy gets better, interest rates will go up and houses will be harder to afford for the average person.”
“Don’t you listen to nuttin I tell you?? If the economy gets better, I’ll be earning more and besides absolute interest rates are still gonna be low, even if they go up. I’ll still be able to get you a nice house. Besides, that Greenspan doesn’t have the balls to raise rates again. Last time he did, the stock market went to crap. He won’t do that again in an election year.”
“Oh Tony, you’re so smart. No wonder you’re the boss.”
“Now if I could only pick stocks like $$$MR. MARKET$$$, I wouldn’t have to work so hard.”
The epilogue to this story is that Tony picked high flying internet stocks with no earnings and lost all of his money. He did find another line of work, however, and eventually bought a big house in the New Jersey suburbs.
Today I bought Standard Pacific (SPF) at 52.27 (that’s right, I finally bought one on a dip). I will sell it in 4 to 6 weeks at 60.35. Here’s why I like SPF:
Don’t say it. I know you are thinking it. “$$$MR. MARKET$$$!! Are you smoking crack?? Another homebuilder???.” With a shortage of desirable land, difficult regulatory processes, favorable demographic trends, economies of scale and numerous acquisition opportunities, homebuilders will continue to show robust growth for many years to come. Yes, interest rates may move higher, but this is likely to occur only if the economy and employment gather steam--not exactly a negative for the industry! You've got companies earning 18 to 20 percent return on equity. They're getting market share from their competitors, and they're selling at roughly nine times earnings. Hello? While the average top home builder share is selling at a price-to-expected 2004 earnings ratio of 8.8 percent, the average S&P 500 stock trades at 17.8.
SPF stock is up over 100% in the last 12 months. Yet it’s PE is only 9.3. 9.3??!! It’s almost impossible to lose money on this investment. I tell you, these homebuilders just get no respect. All they do is make money. The 12 month r^2 value is 0.90. For all of the fear and doubt about the economy and the clever balancing act between economic growth and fear of inflation and interest rate hikes, this stock just keeps steadily climbing in price. Look at its chart:
SPF has grown its revenues by 25% per year over the last 5 years while growing their earnings by 34% per year over the last 5 years. Their annual earnings, revenues and total cash flow have grown each and every year for the last 7 years. No hiccups…even through a very bad economic period.
Standard Pacific is one of the nation's largest and most successful homebuilding companies with shares traded on the New York Stock Exchange. They have created more than 60,000 homes in California, Texas, Arizona, Colorado, Florida and North Carolina over the past four decades. Home ownership is a cherished American tradition. . The Company constructs homes within a wide range of price and size targeting a broad range of homebuyers. Standard Pacific operates in some of the strongest housing markets in the country. It's the 11th-largest home builder in the country and ranks No. 5 in California. In Florida, it ranks second in Tampa and fifth in Miami. While Standard Pacific might not be everywhere, the markets it's in are strong ones. SPF is currently in five of the six top growth states in the country. These states produce 43% of all the new housing in the country.
SPF is in a very favorable industry. In the past decade there has been tremendous growth in housing. Also, SPF is very diversified around the core homebuilding operation. They have a pretty sophisticated financial-services operation. Despite shares of some home builders more than doubling last year, they may still be relatively cheap compared with some other sectors of the stock market.
Standard Pacific Corp. began homebuilding operations in 1966 through its predecessors. The company's strategy involves focusing on growth in existing markets; expanding and diversifying geographically through acquisitions; targeting a broad range of homebuyers; maintaining strong land positions, often via the use of joint ventures and strategic alliances; leveraging its management team and decentralized operating structure; and operating conservatively with emphasis on control of overhead and operating expenses.
Besides low mortgage rates it is demand, which is increasingly being influenced by demographics, that has made homebuilding such a great success. Baby boomers, children of baby boomers, immigrants, and children of immigrants are all fueling demand. SPF is in an industry with rising demand through probably the next decade to 15 years. Estimates are for 1.7 million to 1.9 million annual housing starts per year over the next 10 to 15 years. For all of 2003, housing starts climbed 8.4% to 1.84 million units, the highest since 1978. Looking to 2004, the National Association of Home Builders forecasts that single-family housing starts will decline 3%, though the absolute figure will still be sky-high. The National Association of Realtors (yep, those ladies that sit around the house all day and watch Oprah) is forecasting that existing-home sales will decline 4.9% to 5.8 million units in 2004.
Home price appreciation should come down to about 5%. This won’t burst the price bubble. Housing continues to boom because interest rates are still at historic lows and we have a supply problem, not a demand problem. Speaking of interest rates, the 30 YEAR TREASURY YIELD INDEX is still only 5.2%.
Inevitably, mortgage rates will begin to rise. However, during the last two periods of rising rates -- 1999 to 2001 -- there were seven quarters of interest rate increases that amounted to 180 basis points. And last year, starting in July through October, there was a 120-basis-point rise in mortgage rates. In both periods, SPF was able to increase their business. More importantly, for the stock price, it took 3 consecutive quarters of negative earnings vs. the previous year (12/01, 3/02 and 6/02) before the stock price even started to decline. During this period of declining year on year earnings from Jan 1, 2002 to June 30, 2002, the stock actually INCREASED in price by about 40%. The low P/E cushion is a tremendous insurance certificate against losing money when buying this stock. In addition, SPF came through the recession in California in the early '90s in pretty good shape relative to the rest of the world. Since they are more of a conservative company, they don't get overextended.
It’s more than mortgage rates that affect the home-buying decisions. It's a lifestyle choice. It's the need to move into a house rather than into an apartment. And there's a lot of flexibility in the home buying. For example, if a buyer was looking at a $200,000 house and rates start to rise, he or she then might look at buying a $180,000 house instead. About 25% of Standard Pacific's housing stock is oriented to first-time buyers. One-third targets move-up buyers. Their buyer profile is typically a growing family. They might be in their low 30s and into their mid-40s, and often they're moving up to a pricier home. There are broader demographic themes that will support growing bottom lines for homebuilders, such as continued immigration into the United States, a shortage of land available for building, and the market share that big builders, like SPF, continue to steal from the "mom and pop" outfits.
Furthermore, the industry will continue to have pricing power. . It should also be noted that sales of single-family homes soared 11.5% for all of 2003 to a record level of 1.085 million homes. The main reason is because the supply of land that's available for home construction in the U.S. remains constrained because of entitlement issues. That keeps pressure on prices. Because of the imbalance between supply and demand, SPF will have increasing pricing power. Standard Pacific’s performance over the next five years will be as good or better than the last five years. Demand will likely taper off some when interest rates eventually rise but that will be more than offset by a lack of land supply. Standard Pacific is in a stronger position than some home builders because of its presence in strong housing markets.
Let’s talk value, shall we? If we assume initial earnings of $204 million grow at a rate of 13.40%, and we discount those future earnings at a rate of 15.00%, we arrive at a net present value for the company's next 10 years of earnings of $1.89 billion. To account for potential earnings beyond the 10th year, we estimate a growth rate of 6.00%, a discount rate of 12.00%, and we arrive at a continuing value of $3.14 billion. To complete the calculation we add these two figures together, subtract the long-term debt for SPF ($1.06 billion), and divide by the outstanding shares (34.0 million) to get a per share intrinsic value of $117.14.
Standard Pacific's 2003 revenue increased 25% from the prior year to $2.4 billion. Earnings shot up 58% to $6.08 a share. First Call analysts expect earnings this year to rise 19% to $7.25. In February, SPF raised its 2004 EPS guidance to $6.90 to $7.00, from previous guidance of $6.40 to $6.50.
SPF report’s 1Q numbers on April 28, 2004. They will obliterate the $0.90 number. Last week, Standard Pacific Corp announced preliminary new home orders for the three-month period ended March 31, 2004, the highest for any first quarter in the Company's history. New home orders for the Company's 2004 first quarter continue to be strong in the Company's three largest markets. In Southern California, orders were up 5% year-over. In Northern California, new home orders were up 125% on a 63% increase in active selling communities, reflecting stronger housing market conditions in the Bay area compared to last year. In Florida, orders were up 28% In Arizona, for the first quarter, orders were up 13% year-over-year despite a 5% decline in the number of active selling communities..
Let’s take SPF’s 2004 guidance of $7.00/share, which they always beat, and which is even lower than the ANALysts guidance of $7.25/share. If you take $7.00 and multiply it by the ridiculously low P/E of 9.3, you get a share price of $65.10, which is well past my sell target. I love making money on safe stocks. (By the way, $$$MR. MARKET$$$ predicts 2004 earnings of $7.53/share.) Geez, SPF only trades at 1.76 times its book value. SPF also pays a dividend. Return on Assets is 9.6%, Return on Equity is 22.6%. This is a well run company, no doubt.
The homebuilding industry has changed. The top players, are no longer rate sensitive and Wall Street has not woke up to the fact. The big companies are going to grow 5 percent faster than the industry. They make good cash flow, and they don't do dumb stuff with it. Wall Street has played it simply as an interest rate play and that's not the reason for you to own the stocks,
SPF directors love their own stock. In January 2003, directors increased the aggregate authorized limit for an April 2001 stock repurchase plan to $75 million, from $50 million. This shows confidence in their own cash flow projections. As of February 2003, SPF had bought back $34.4 million of stock under the plan, leaving about $40.6 million available for future purchases.
Here’s what the boss thinks:
Stephen J. Scarborough, Chairman and Chief Executive Officer, stated, "Our record operating results for the 2003 fourth quarter cap another tremendous year of top line and bottom line growth reflecting the continued strength of the homebuilding industry and Standard Pacific's growing position in some of the largest and most dynamic markets in the country.
"The Company's record of revenue and earnings growth is the result of our balanced strategy of expanding in our existing markets as well as into new geographic markets with long-term growth potential. Building on our success in 2003, we expect to see opportunities for continued growth this year with deliveries projected to increase in all three of our operating regions -- the West, Southwest and Southeast."
"We are also pleased with the progress we have made with respect to improvements in our homebuilding gross margin percentage, which was up 330 bp's year-over-year to 22.8%, and in our return on average stockholders' equity, which was 22.6% for the year ended December 31, 2003. These positive results reflect a growing emphasis in our organization on achieving strong shareholder returns while continuing to conservatively manage our balance sheet."
"As a result of our strong finish in 2003, which generated record order levels and backlog, we are raising our 2004 earnings' guidance for the full year to between $6.90 and $7.00 per share, up from our previous guidance of $6.40 to $6.50 per share. This would represent up to a 15% increase over our full year 2003 per share earnings. The updated guidance for 2004 reflects the impact of the one million new shares of common stock issued in December of 2003 to fund our growth initiatives. For 2004 we are targeting 9,300 deliveries, excluding 300 joint venture new homes, and homebuilding revenues of approximately $3.2 billion. To support our 17% increase in projected deliveries this year, we are planning to open between 100 and 110 new communities, up approximately 30% year-over-year. As a result of the seasonal nature of our business and the timing of new community openings, we expect that approximately 60% of our profits this year will be generated in the second half of the year."
Mr. Scarborough added, "As we conclude yet another successful year we look ahead to a bright future for our Company. We are encouraged by the underlying dynamics in the industry including prospects for long-term household growth driven by immigrant inflows and an aging population. We believe that these positive demographic trends and the growing constraints on the supply of new housing, coupled with our balanced growth strategy and experienced management team, provide a solid foundation as we begin 2004 with the anticipation of another record year."
So…the question is: Does $$$MR. MARKET$$$ have one more homebuilder left in him? A very HUGE question indeed. With the US economy in the midst of a recovery, but with the rebound likely to remain controlled, interest rates should stay low. 30 year rates should stay around current historical lows (less than 6%) for the next two years and inch up a little in 2006/2007 (maybe to 7%). So through 2005, homebuilders should continue to outperform the market. Homebuilders were up 97% in 2003 vs. 27% for the S&P 500. A fast horse indeed.
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