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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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Centex (CTX), D.R. Horton (DHI), and KB Home (KBH) |
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Analyst Target Range (Low-High): D.R. Horton (DHI): $23.00-$33.00 KB Home (KBH): $32.00-$65.00 |
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· Centex (CTX) likely has, proportionally speaking, more older land than other builders. This will be beneficial for the company down the line as it needs to expense less-costly land and also incurs less of a risk from asset impairments. The majority of Centex’s exposure to recent expensive land comes in the form of options, which the company can walk away from at a much lesser cost than would be occurred if it had bought the land outright. · Centex currently trades for 1.17x net book value, and because of the company’s wide geographic footprint and land age, we believe that 1.40x current book is a fair multiple — giving CTX a fair value of $54.80, or 19.6% above Monday’s close. · D.R. Horton (DHI) primarily markets its homes to first-time buyers, as well as first-move-up customers. Being in the lower end of the market, the company’s base is more reliant on the availability of easy credit; this should be detrimental to the company over the next several years as we believe interest rates are not likely to decline anytime soon due to various macroeconomic and political factors. · DHI sees a majority of its revenues from Midwestern operations; this area was generally less prone to bubble-type market conditions compared to areas in the Southeast, Southwest, and West. The tradeoff for market growth potential comes at a reduced risk of overpaying for land, so we believe DHI will write-off a lesser proportion of land than average, given its purchasing patterns. · Don Tomnitz, CEO and President at D.R. Horton, recently was quoted as saying “2007 is going to suck” as well as “We may have more impairments coming.” Given DHI’s business strategy, we admire his honesty and are largely in agreement. · In our opinion, DHI should trade at a slight discount to the overall homebuilder group in general, plus the specific-risk of asset impairment must be taken into account. Our fair P/B multiple will be 1.30x current book, and with the company trading at 1.17x book right now we believe it is slightly undervalued - our DHI target is $25.13, or about 11% upside. · KBH aims at targeting more entry-level homebuyers, a segment we would prefer homebuilders to have a minimal dependence on. We do, however, believe that KBH has been more conservative in terms of loading up on pricey land, and more aggressive in moving units; both positives. KBH also has exposure to the French market with operations in that country, which will provide much needed market diversity to help the company weather the current downturn - something we feel the market is overlooking. · Because readying land does not add value in terms but is more about minimizing cost, KB Home scores points here for minimizing its involvement with the land development process, which has seen rapid increases in the cost over the past several years. · KB Home’s owned land is fairly old compared to the general homebuilding group; with a large majority of that land being bought in 2004 and before, when land prices were relatively low. KBH does have a significant amount of options which were negotiated in recent years, however, adding to impairment risk there. · KBH currently trades at 1.44x current book; and we believe that the company should trade at 1.4x current book given the small to moderate impairments we see being likely; this puts KBH as being overvalued by about 3% giving a target price of $42.50.
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CTX Closed at $45.80 on 4-23-07 |
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DHI Closed at $22.59 on 4-23-07 |
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KBH Closed at $44.26 on 4-23-07 |
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Released 4-23-07 |
