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: Carl, which companies stand out as you review the performance of the group through the second half of 2000 and in 2001 year to date?

Mr. Reichardt: From a price appreciation standpoint, we’ve been surprised at how well the smaller capitalization companies have done relative to the larger cap companies. As consolidation in the industry becomes a bigger, more important theme, some of the small caps have run up on speculation that they may be acquired by larger builders. In addition, I think the law of large and small numbers is helping them as well, as some of the smaller companies have easier growth comparisons than the larger companies do.

TWST: Carl, you noted earlier that D.R. Horton (NYSE:DHI) is one of your favorites; is it close to the top of your list?

Mr. Reichardt: Factoring in valuation, Lennar (NYSE:LEN) is at the top of our list. I would preface this by saying that we look for companies we believe can grow through cycles and that are developing a low cost advantage, whether that’s through land ownership, the production of homes themselves, or from a control of fixed costs standpoint. We also look at valuation on a p/e to growth basis, and like builders trading around 50% of their growth rates. We like companies with a yearlong supply of lots and liberal use of options to control those lots. We also like companies with a presence in strong growth markets, but with enough geographic diversification to hedge individual market risk, and deep market share in those markets. Again, we like builders with a focus on entry-level product, given today’s economic climate. We prefer management teams with experience in integrating acquisitions, as we see continued industry consolidation. Obviously, structurally high margins and a flexible capital structure are important hallmarks as well. In the end, we want the optimization, or the balance, of growth and risk. Lennar really represents to us the cream of the crop with regard to meeting those criteria. We think it’s the builder that’s most likely to actually grow through economic cycles. We also think that it’s reasonably cheap at about 8.9 times our 2001 estimate. That’s a little more than 50% of its 16% growth rate. Lennar is a 20% revenue grower, with operating margins that are second only to Toll Brothers (NYSE:TOL) in our coverage universe. They’ve got excellent, low cost land positions, with 126,000 lots in some of the best states in the country — such as Florida, Texas, California, and Arizona — with about half controlled through options. They have a management team that has consistently been able to pick the bottoms in land cycles for at least two decades, and I think that consistency breeds a trend. In addition, they bought U.S. Home a little more than a year ago, the eighth largest builder in the US at the time, for near book value. We think the integration between Lennar and U.S. Home has gone quite well up to this point. But what we really like is Lennar’s balance sheet. They have $1 billion on their balance sheet in borrowing capacity to do more acquisitions if the market turns down. They’ve announced a 10 million share buyback, too. Management is highly focused on return on capital. The CEO’s family, the Millers, controls the company’s voting shares, which may be an issue, but it also points to the company’s shareholder focus. In the end, Lennar isn’t so much a homebuilder as it is a mispriced asset identifier and purchaser. That’s what management does. It just so happens that housing often provides those mispriced assets. And Lennar keeps the balance sheet clean to take advantage of the opportunities they’re so good at finding.

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.