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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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NVR, Ryland (RYL), and Toll Brothers (TOL) |
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· NVR is the most conservative homebuilder in terms of how it handles investments in land. NVR exclusively uses options to purchase land and only takes possession when it is ready to develop. NVR is also unique in that it has more cash than debt. Because of this business strategy, NVR typically trades at a premium to the group, currently being at 4.0x net book value. · Another factor in NVR’s superiority to the general homebuilding group has been its lack of involvement in plot development, where the costs of readying land for building have soared. As we noted earlier in talking about KBH, exposure to land development is generally not positive, with the primary exception being in the case of TOL, which has the engineering expertise necessary to lower costs. · Because of NVR’s unique characteristics and the age of its options contracts, which were generally negotiated during years when land was cheaper, we believe 3.5x current book is a fair multiple for NVR; this puts the company’s shares as being worth $680. · Ryland preannounced lower results for Q1 2007, in part because of impairment charges that are being taken. Operationally, however, Ryland’s results were above expectations, and it looks to be one of the better prepared builders with low debt levels and low levels of land inventory. The company should also benefit from having negotiated most of its land and options in 2004 and prior. · We feel that RYL should trade around 1.55x current book (net of the announced impairment) given the company’s generally sound operating procedures; with RYL currently trading for 1.36x book, we see the shares as being worth $52.15 - 14% upside. · Toll Bros. maintains the largest land bank in the residential construction industry by a wide margin, with estimates placing land reserves equal to six years of construction. TOL’s market position should allow it to expense more expensive land acquired in recent years over a period of time, allowing the company to maintain its normally high gross margins. · Because TOL focuses on the high-end segment of the housing market, the company should also prove to be more resilient to credit tightening or regulation, as its customers are less dependent on generous financing terms. · Despite the age of TOL’s land, its options contracts are weighted to the most recent (expensive) years. Although the traditionally long carrying process the company uses gives it the possibility that land values will rebound, at some point TOL will either need to use and expense the more-costly land taken from the options, or will have to write the deposits off. TOL will likely be impacted further down the line by the industry changes of the last several years, which could give investors a skeptical view of the stock until the impact of 2005/2006 is completely clear. · TOL currently trades at 1.29x book, and we believe a fair multiple for the company is 1.45x current book; from this, we see upside of 12.5% to $32.80.
Lest we be seen as too optimistic about homebuilding stocks, let it be known we have chosen to focus primarily on the higher-quality plays; we have been and are negative on Technical Olympic (TOA), and also believe that stocks like Levitt (LEV), Orleans Homebuilders (OHB) and WCI Communities (WCI) are value traps that should be avoided.
Back to the main Homebuilders page, or to CTX, DHI, and KBH. |
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Analyst Target Range (Low-High): Ryland (RYL): $44.00-$73.00 Toll Bros. (TOL): $24.00-$41.00 |
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NVR Closed at $775.00 on 4-23-07 |
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RYL Closed at $45.77 on 4-23-07 |
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TOL Closed at $29.17 on 4-23-07 |
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Released 4-23-07 |
