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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: Joe, what will it take to get multiple expansion in this group? And what’s an appropriate valuation for the group, in your view?

Mr. Sroka: I think it may take a downturn in housing as an industry to get any meaningful multiple expansion. As mentioned earlier, a robust housing market has created a rising tide that lifts all ships. If a downturn occurs in the housing market, I believe some of the larger companies are in the best position to stem the effect of the downturn. These are the companies that will emerge on the other end with higher multiples because they will have differentiated themselves in a difficult market. With respect to valuations, historical average evaluations are approximately 9.0 times forward earnings. Our group average on forward earnings is about 7.5 times, so I certainly think that a higher single-digit valuation is appropriate in the near term. The companies that can truly distinguish themselves through a down cycle will clearly deserve double-digit valuations.

TWST: Sam said that the housing industry has defied the best minds of analysts and economists by soldiering on as the economy has weakened. Joe, historically, hasn’t the housing industry been one of the first to falter in a weakening economic environment? Why hasn’t that happened this time?

Mr. Sroka: Housing is traditionally considered to be an early-cycle group. A fall-off in housing and construction is often what leads the economy into a decline. There are a couple of factors that have made things different this time. First, a lot of industries that were deemed to be non-cyclical, such as technology and telecommunications, have led the economic decline over the past nine to 12 months. It really has not been the basic industries that led the economy down. Second, we are in a low interest rate environment and this is good for housing affordability. Third, even though unemployment has drifted upward, we are still in a relatively good employment environment. I think these last two factors, in particular, have helped sustain housing. Another point I would add with respect to the interest rate environment is the greater sophistication of the mortgage industry. Housing has traditionally been very boom-bust due to its rigid tie to interest rate cycles. This is because the old convention was to take out a 30-year fixed-rate mortgage from the local bank to purchase your home. You paid the mortgage every month until it was paid off and then you owned the home. Today there is a much more sophisticated financial services sector that has been able to offer different types of mortgage structures, both fixed-rate and adjustable-rate, that have allowed home buyers to be in the market for a great portion of the cycle at acceptable affordability levels. Mortgage lenders also have a greater ability to package and sell mortgages into the secondary market. This type of dynamic financial services market did not always exist in previous economic cycles.

TWST: Joe, what are your two or three favorite stocks at this point?

Mr. Sroka: As I mentioned earlier, my top pick in the group is Centex (NYSE:CTX). I like the company’s diversified portfolio. Core homebuilding operations represent approximately 65% of Centex’s revenue. It has some attractive growth prospects in other business lines such as financial services, investment real estate, commercial construction and contracting, and home services such as security monitoring and pest control. Centex also has two businesses that aren’t performing as well right now: manufactured housing and construction products. Any improvement in those areas would be an additional benefit.

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.