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Seven analysts and top management from sixteen sector firms examine the homebuilding industry sector in this special 89-page Homebuilding Industry issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info506.htm

TWST: Why are these stocks so cheap, Carl?

Mr. Reichardt: They’re cheap for a couple of reasons. One, they’re still perceived as pure cyclicals. While the housing market, over time, is likely to be relatively cyclical because it’s so dependent on capital flows for both builders and buyers, I do think that the earnings streams of large public companies are somewhat less cyclical than they used to be. More continuous access to lower-cost funds, ability to leverage scale to take market share in good times and bad, reticence to add speculative supply -– all of these things help smooth and grow earnings. So perhaps the “cheapness” of these stocks is less deserved today than it has been in the past, and multiple expansion is due. Two, homebuilding companies generally don’t have fixed assets that they leverage. The balance sheet on the asset side is mostly land. And when that land disappears (when a company sells a house), it has to replace it with additional land. And you’re never really sure what the cost of that new land is going to be. It’s different from having a factory or a building that sits for a long period of time that you put cap ex into, but basically, where production costs and margins should in theory be predictable. Homebuilding is not like that. Perhaps a lot of investors look at that and say, "Well, these companies are dependent on the value of the land acquired to generate returns.” As land values fluctuate based on economic cycles and, just as important, capital cycles, that’s going to add to the potential cyclicality or beta of the return stream. And uncertainty in the return stream typically breeds lower multiples. In addition, this is a fairly small cap sector, even despite how strong the stocks have been, and we do think that the sector gets a liquidity penalty. With the biggest market cap in the group running under $4 billion, that’s not very large compared to a lot of other sectors.

TWST: Let’s move on to what your recommendations are today. I take it you’re still recommending Lennar (NYSE:LEN) and Horton (NYSE:DHI)?

Mr. Reichardt: Yes, I am. We like Lennar, and there are a few reasons for that. Our price target is $65. We’re looking at $6.15 for earnings in 2002, and $6.85 in 2003. It’s a November year. First of all, Lennar has a great balance sheet. It has $825 million in cash and a $1 billion revolver with zero outstanding on it as of their last reported quarter. That gives the company enormous flexibility to make acquisitions or do share buybacks. And they’ve got a 10 million-share buyback authorized currently. Second, I love their land positions. They have low basis lots in some high growth markets, including California, Florida, Texas and Colorado. They have a presence in Arizona, and they’re expanding their Washington DC/Maryland/Virginia corridor. Third, they’ve got very high operating returns relative to other builders that build at their price point, which is largely first time and first time move-up. The return on invested capital is near 15%, and their operating margins, as of their last quarter, were close to 14%, which are the best among their competitors at these price points. And finally, I think there is a lot of EPS upside here for this company in 2002. I wouldn’t be surprised to see earnings that approximate $6.80 or potentially higher, closer to $7.00. So I think there’s still a lot of room for this company to end up beating expectations going forward.

This special issue includes:

1) Homebuilding Industry - In an in-depth (13,500 words) Analyst Roundtable, Scott H. Campbell, Vice President-Homebuilding and REIT Equity Research at Raymond James & Associates, David Jarrett, Vice President at Credit Lyonnais Securities (USA) Inc., Samuel A. Lieber, CEO of Alpine Management & Research, LLC, Joseph Sroka, Vice President at Merrill Lynch & Co., Inc., James Wilson, Managing Director at Jolson Merchant Partners Group, LLC, examine the outlook for the sector including industry consolidation, interest rate outlook and share specific stock recommendations.

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

3) Outlook for Homebuilding Stocks - In an in-depth (5,000 words) Analyst Interview, Carl E. Reichardt, Principal at Banc of America Securities, examines the outlook for the sector including and shares specific stock recommendations.

4) Building Materials Manufacturers - In an in-depth (3,900 words) Analyst Interview, Robert Marshall, Senior Analyst following the housing/building materials sector at Wachovia Securities, examines the outlook for the sector including and shares specific stock recommendations.

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