For Subscribers

Get the complete article now!

Four analysts and top management from ten sector firms examine the HomeBuilders Industry sector in this special 64-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info400.htm

TWST: Scott, turning to the valuations, what do the current valuations of the homebuilding stocks suggest? And why don’t the valuations reflect the returns that the companies have been showing?

Mr. Campbell: Current valuations across the group of 12 builders that we track are averaging a p/e multiple of roughly 7.5 times 2001 estimates; then as we look out to 2002, the group is trading at roughly 7 times 2002 numbers. Historically, when multiples are at these levels, it suggests an imminent decline in housing activity, followed closely by a significant earnings decline for the homebuilders. Unfortunately, the market has had that view since 1996, with the exception of a 12-month period between late 1997 and late 1998, when p/e multiples last reached the mid-teen level. Basically, the group was largely ignored by investors up until March of last year despite posting pretty impressive earnings growth and consistently improving return metrics, including return on equity and return on invested capital. I think there were two main reasons for this: first, concerns over the length of the current cycle. Up until recently, we have enjoyed the longest period of economic expansion in US history, and I think people had largely been expecting expansion to end and housing activity to follow suit. Second, the technology/Internet phenomenon that developed in 1998-2000 drew a lot of capital away from old economy names, as the theory goes.

TWST: Scott, are there one or two stocks that you would consider to be really compelling buys in the group today?

Mr. Campbell: Certainly. Our top pick is Pulte (NYSE:PHM), and I like the fact that strategically they are acquiring Del Webb. As with any large acquisition, there are integration risks, but I believe a lot of that is already priced into the stock. The stock is trading at 6.6 times our 2001 estimate of $6.40 and only 5.8 times our 2002 estimate of $7.05 per share, representing roughly a 15%-20% discount to its large cap peers. Earnings growth will approach 25% this year and approximately 10% in 2002, excluding Del Webb, which should be accretive next year by 5%-10%. The Webb transaction offers a tremendous amount of synergies; it’s really going to be up to management to execute, and we think they’re up to the task. Although Pulte has never completed an acquisition of this size, they have been fairly acquisitive during the last five years or so, including a fairly large acquisition in the South Florida area during 1998, which is currently one of their better performing divisions. The stock is cheap, we like the management team, and with this acquisition, Pulte will become the most dominant builder serving the active adult segment, a demographic group that offers tremendous opportunity over the next several decades. Another thing to consider with the Del Webb acquisition is that there’s going to be a tremendous amount of cash flow thrown off from the combined entity. Assuming management can make the appropriate decisions with that cash flow, I really like the prospects over the next year or so.

This special issue includes:

1) HomeBuilders Industry - In an in-depth (15,000 words) Analyst Roundtable, Scott H. Campbell, Vice President at Raymond James & Associates, Samuel A. Lieber, CEO/ Portfolio Manager at Alpine Management & Research LLC, Carl E. Reichardt, Principal at Banc of America Securities and Joseph Sroka, Vice President at Merrill Lynch, examine the outlook for the sector including, varied mortgage products, tightness of supply and share specific stock recommendations.

2) The TWST confidential Off-The-Record survey of management performance at ten sector firms asked market insiders about the ability of management teams to create shareholder value.

3) CEO interviews (average 2,500 words). Top management of ten sector firms examine the outlook for their firm and the sector.