Friday, June 20, 2008

Homebuilders Ranked By Discount and By Debt

We saw here that there are home builders trading at huge discounts to their book values. Could some of these offer a chance to buy land at a big discount? It's worth taking a deeper look at some of these issues. If they are leveraged to the hilt, they might not be as attractive as they seem. So here's a second look at this list, but this time including each company's debt to capital ratio:

Clearly, many of these companies are leveraged to the hilt. I don't think it was their original intentions to have so much debt, but recent writedowns have probably forced them into this situation.

Notice Cavco (CVCO) has no debt on its books. A company in this condition is able to weather cyclical downturns fairly easily, and that's one of the reasons we prefer companies with little debt. Notice, however, that it's trading to a 73% premium to book value, so it's not immediately obvious whether its trading at a discount to its intrinsic value.

The companies that look somewhat appealing in this chart are M/I Homes (MHO), followed by Lennar (LEN). They trade at significant discounts to book, with debt to capital in the 30% range. Might be time for a closer look!

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