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Analyzing long term business viability in selection of cyclical stocks

 

Source: Dow Jones MarketWatch, December 14, 2017 article

How to find value amid a boom in U.S. housing stocks

Published: Dec 14, 2017 8:42 a.m. ET

Shares of home builders have run ahead of a strong stock market

Bloomberg

Contractors raise framed walls in San Jose, Calif.

 

By

Philip

van Doorn


 Investing columnist

 

 

No doubt you’ve seen or heard reports about a housing shortage in the U.S. While this can make it difficult to buy a home, it can make you plenty of money as an investor, as long as the trend continues.

Let’s take a broad look at dozens of housing-related stocks to find value.

First, the big picture. This chart shows a very healthy market for sellers of new homes in the past five years, after the housing-market collapse and the 2008 financial crisis:

Here’s how the SPDR S&P Homebuilders ETF XHB has performed this year through Dec. 12 against the S&P 500 Index SPX:

FactSet

The ETF tracks the S&P Homebuilders Select Industry Index, which includes 37 S&P 500 companies that build homes or provide related products or services.

Here’s a 10-year chart comparing the total return of the ETF with the S&P 500, through Dec. 12:

FactSet

Of course, in December 2007, the housing-market collapse had already started and the forward-looking stock market had already sent shares of home builders and related companies plunging.

Looking instead at an 11-year chart, the story changes to show a cyclical industry that can still perform very well over long periods:

FactSet

Other factors influence the housing market, of course, both nationally and regionally. There’s no sign of a slowdown for the U.S. economy, but the Federal Reserve is slowly and steadily raising short-term rates. Mortgage loan rates are still very low, but nobody knows how the tax-reform legislation that may be passed and signed into law by President Trump as early as next week might affect the housing market.

If you believe in the long-term strength of U.S. housing and are looking for a broad long-term investment, you might simply go with the SPDR S&P Homebuilders ETF and its 36 holdings. Another option is the iShares U.S. Home Construction ETF ITB which tracks the Dow Jones U.S. Select Home Construction Index and has 47 stock holdings. Even so, it is much more heavily concentrated in stocks of the largest home builders.

The iShares ETF’s five largest holdings are all home builders, and they make up 45% of the fund. The fund has returned 54% through Dec. 12. The SPDR ETF’s top five holdings are four home builders and Home Depot (No. 5) that together comprise 25% of the fund. That fund has returned 28%, and the S&P 500 has returned 21% this year.

A short-term look at the components of XHB

We focused our screens on the SPDR S&P Homebuilders ETF. Here are its components, ranked by how much their sales for the past 12 reported months (through Dec. 12) increased from the year-earlier 12-month period:

Company

Ticker

Industry

Change in sales per share - past 12 months from year-earlier 12-month period

Gross margin - past 12 months

Gross margin - year-earlier 12-month period

Total return - 2017 through Dec. 12

LGI Homes Inc.

LGIH

Homebuilding

29%

26.25%

26.24%

146%

Installed Building Products Inc.

IBP

Building Products

29%

27.01%

27.81%

69%

PulteGroup Inc.

PHM

Homebuilding

28%

22.55%

21.56%

86%

William Lyon Homes Class A

WLH

Homebuilding

24%

17.28%

17.99%

48%

Century Communities Inc.

CCS

Homebuilding

20%

18.39%

20.13%

40%

iRobot Corp.

IRBT

Electronics/ Appliances

19%

50.20%

47.39%

20%

M.D.C. Holdings Inc.

MDC

Homebuilding

17%

16.69%

16.53%

35%

Toll Brothers Inc.

TOL

Homebuilding

17%

21.60%

19.84%

53%

Lowe’s Cos.

LOW

Home Improvement chains

16%

32.16%

32.26%

22%

Lennar Corp. Class B

LEN.B

Homebuilding

16%

21.44%

22.09%

46%

Lennar Corp. Class A

LEN

Homebuilding

16%

21.44%

22.09%

46%

D.R. Horton Inc.

DHI

Homebuilding

15%

21.63%

21.84%

85%

Taylor Morrison Home Corp. Class A

TMHC

Homebuilding

14%

18.70%

19.39%

21%

Owens Corning

OC

Construction Materials

14%

24.78%

24.75%

70%

A.O. Smith Corp.

AOS

Building Products

13%

41.10%

41.58%

30%

M/I Homes Inc.

MHO

Homebuilding

12%

20.96%

22.47%

36%

Lennox International Inc.

LII

Building Products

11%

29.33%

29.23%

36%

Home Depot Inc.

HD

Home Improvement Chains

11%

32.28%

32.32%

39%

CalAtlantic Group Inc.

CAA

Homebuilding

11%

21.24%

22.04%

62%

TopBuild Corp.

BLD

Building Products

10%

24.02%

23.17%

83%

NVR Inc.

NVR

Homebuilding

10%

19.47%

19.43%

102%

Cavco Industries Inc.

CVCO

Homebuilding

10%

22.39%

22.20%

40%

Bed Bath & Beyond Inc.

BBBY

Specialty Stores

9%

37.02%

37.83%

-42%

Fortune Brands Home & Security Inc.

FBHS

Building Products

8%

36.17%

35.29%

27%

Allegion PLC

ALLE

Building Products

7%

43.85%

43.93%

29%

Masco Corp.

MAS

Building Products

7%

34.11%

32.96%

35%

Whirlpool Corp.

WHR

Electronics/ Appliances

6%

16.48%

17.82%

-6%

Mohawk Industries Inc.

MHK  

Home Furnishings

6%

31.93%

31.75%

38%

Williams-Sonoma Inc.

WSM

Specialty Stores

6%

36.73%

36.73%

8%

Leggett & Platt Inc.

LEG

Home Furnishings

4%

22.20%

24.14%

-3%

Helen of Troy Ltd.

HELE

Electronics/ Appliances

4%

43.90%

42.73%

8%

Aaron’s Inc.

AAN

Finance/ Rental/ Leasing

3%

47.03%

47.45%

13%

Tempur Sealy International Inc.

TPX

Home Furnishings

2%

41.72%

41.72%

-11%

Johnson Controls International PLC

JCI

Misc. Commercial Services

2%

30.85%

25.01%

-5%

Tri Pointe Group Inc.

TPH

Homebuilding

1%

21.48%

23.60%

52%

USG Corp.

USG

Construction Materials

-15%

20.86%

23.13%

28%

Source: FactSet

You can click the tickers for more information on each company, including news, price ratios, financials and filings.

We are showing sales per share, rather than raw revenue, because the per-share figures incorporate any dilution from the issuance of new shares for any reason (including to pay for acquisitions) as well as any decline in the share count brought about by stock buybacks.

A company’s gross profit margin is sales, less the cost of goods or services sold, divided by sales. It is a measure of profitability for the core business and reflects pricing power. A declining margin might mean that a company has been forced to offer more discounts to defend its market share or to increase sales.

Here’s the list again, in the same order, with summaries of the opinions of sell-side analysts polled by FactSet:

Company

Ticker

Share ‘buy’ ratings

Share neutral ratings

Share ‘sell’ ratings

Closing price - Dec. 12

Consensus price target

implied 12-month upside potential

LGI Homes Inc.

LGIH

33%

67%

0%

$70.73

$65.60

-7%

Installed Building Products Inc.

IBP

75%

25%

0%

$69.80

$73.86

6%

PulteGroup Inc.

PHM

36%

59%

5%

$33.69

$30.97

-8%

William Lyon Homes Class A

WLH

40%

60%

0%

$28.25

$30.88

8%

Century Communities Inc.

CCS

100%

0%

0%

$29.50

$33.80

15%

iRobot Corp.

IRBT

22%

67%

11%

$70.40

$72.60

3%

M.D.C. Holdings Inc.

MDC

0%

64%

36%

$31.17

$28.39

-9%

Toll Brothers Inc.

TOL

48%

48%

4%

$47.09

$48.86

4%

Lowe’s Cos.

LOW

53%

44%

3%

$84.99

$88.10

4%

Lennar Corp. Class B

LEN.B

52%

48%

0%

$49.29

$61.54

25%

Lennar Corp. Class A

LEN

52%

48%

0%

$61.43

$61.54

0%

D.R. Horton Inc.

DHI

52%

48%

0%

$50.00

$49.05

-2%

Taylor Morrison Home Corp. Class A

TMHC

8%

92%

0%

$23.35

$24.75

6%

Owens Corning

OC

64%

36%

0%

$86.98

$90.35

4%

A.O. Smith Corp.

AOS

43%

57%

0%

$61.06

$64.29

5%

M/I Homes Inc.

MHO

100%

0%

0%

$34.26

$36.50

7%

Lennox International Inc.

LII

24%

76%

0%

$206.68

$193.33

-6%

Home Depot Inc.

HD

71%

29%

0%

$181.80

$188.09

3%

CalAtlantic Group Inc.

CAA

7%

93%

0%

$54.75

$49.05

-10%

TopBuild Corp.

BLD

71%

29%

0%

$65.24

$73.14

12%

NVR Inc.

NVR

11%

78%

11%

$3,368.97

$3,231.00

-4%

Cavco Industries Inc.

CVCO

100%

0%

0%

$140.00

$164.00

17%

Bed Bath & Beyond Inc.

BBBY

4%

71%

25%

$23.18

$22.83

-1%

Fortune Brands Home & Security Inc.

FBHS

50%

50%

0%

$67.23

$71.21

6%

Allegion PLC

ALLE

55%

45%

0%

$82.15

$89.78

9%

Masco Corp.

MAS

68%

32%

0%

$42.19

$44.63

6%

Whirlpool Corp.

WHR

36%

64%

0%

$166.51

$187.13

12%

Mohawk Industries Inc.

MHK  

78%

22%

0%

$275.34

$294.84

7%

Williams-Sonoma Inc.

WSM

14%

64%

22%

$50.90

$49.57

-3%

Leggett & Platt Inc.

LEG

44%

56%

0%

$46.33

$54.86

18%

Helen of Troy Ltd.

HELE

60%

20%

20%

$90.90

$104.25

15%

Aaron’s Inc.

AAN

82%

18%

0%

$36.02

$47.14

31%

Tempur Sealy International Inc.

TPX

36%

55%

9%

$61.00

$66.14

8%

Johnson Controls International PLC

JCI

37%

58%

5%

$38.25

$44.29

16%

Tri Pointe Group Inc.

TPH

58%

42%

0%

$17.42

$17.95

3%

USG Corp.

USG

10%

76%

14%

$36.92

$33.71

-9%

Source: FactSet

While there are majority “buy” or equivalent ratings for 18 out of the ETF’s 36 components, the analysts’ price targets for most of them aren’t particularly aggressive.

A longer-term look

The first table showed sales per share and gross margin. It’s good if both are going up, of course, but these figures don’t incorporate other expenses or other problems companies face.

There’s a new tool that you can use to make useful comparisons of companies to their industry competitors. It’s called return on corporate capital (ROCC) and was recently developed by the Shareholder Forum to help individual investors screen companies for quality.

The calculation is similar to return on invested capital (ROIC), but there are some differences. There’s no strict definition for ROIC. ROCC is calculated the same way for every company that’s publicly traded in the U.S., using annual data filed with the Securities and Exchange Commission: Net income plus interest expense and income taxes, divided by the ending balance of total assets less current liabilities other than interest-bearing debt.

The idea is to measure how good a company’s management is at investing the money it raises or borrows. Each company’s ROCC is compared to its industry competitors, based on the company’s Standard Industrial Classification (SIC), which also comes from SEC filings. In other words, the subject company’s numbers are excluded from those of its industry SIC group when the comparison is made. The comparisons are available here for free.

ROCC comparisons are most meaningful within industries. Banks, for example, tend to have lower ROCC than many other industries because it is their business to leverage capital by gathering deposits and borrowing money.

Here’s a sample comparison of LGI Homes Inc. LGIH  to its SIC industry group:

The Shareholder Forum

You can see that the company’s average ROCC for five years has been well above that of its industry competitors, and that the numbers have been sloping upward over the past two years.

Here are the components of the SPDR S&P Homebuilders ETF again, in the same order, with average ROCC comparisons to their industry groups.

Company

Ticker

Five-year average ROCC

Five-year average ROCC for SIC group

SIC group

LGI Homes Inc.

LGIH

13.8%

6.2%

Operative Builders

Installed Building Products Inc.

IBP

11.8%

7.4%

General Building Contractors - Residential Buildings

PulteGroup Inc.

PHM

7.0%

6.1%

Operative Builders

William Lyon Homes Class A

WLH

4.4%

6.3%

Operative Builders

Century Communities Inc.

CCS

6.8%

7.1%

Operative Builders

iRobot Corp.

IRBT

12.5%

10.4%

Household Appliances

M.D.C. Holdings Inc.

MDC

4.6%

6.3%

Operative Builders

Toll Brothers Inc.

TOL

4.7%

6.4%

Operative Builders

Lowe’s Cos.

LOW

15.5%

29.2%

Retail - Lumber and Other Materials Dealers

Lennar Corp. Class B

LEN.B

7.0%

9.1%

General Building Contractors - Residential Buildings

Lennar Corp. Class A

LEN

7.0%

9.1%

General Building Contractors - Residential Buildings

D.R. Horton Inc.

DHI

11.1%

5.2%

Operative Builders

Taylor Morrison Home Corp. Class A

TMHC

0.3%

6.6%

Operative Builders

Owens Corning

OC

6.1%

0.7%

Abrasive Asbestos and Misc. Nonmetallic Mineral Products

A.O. Smith Corp.

AOS

16.9%

9.5%

Household Appliances

M/I Homes Inc.

MHO

6.0%

6.2%

Operative Builders

Lennox International Inc.

LII

27.1%

18.9%

Air Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment

Home Depot Inc.

HD

31.0%

14.6%

Retail - Lumber and Other Materials Dealers

CalAtlantic Group Inc.

CAA

6.1%

6.2%

Operative Builders

TopBuild Corp.

BLD

6.1%

3.1%

Construction Special Trade Contractors

NVR Inc.

NVR

19.9%

5.6%

Operative builders

Cavco Industries Inc.

CVCO

8.3%

N/A

Mobile Homes

Bed Bath & Beyond Inc.

BBBY

32.8%

19.0%

Retail - Home Furniture, Furnishing and Equipment Stores

Fortune Brands Home & Security Inc.

FBHS

10.0%

6.7%

General Building Contractors - Residential Buildings

Allegion PLC

ALLE

17.9%

-34.4%

Detective, Guard and Armored Car Services

Masco Corp.

MAS

15.4%

4.8%

Millwood, Veneer, Plywood and Structural Wood Members

Whirlpool Corp.

WHR

9.5%

14.5%

Household Appliances

Mohawk Industries Inc.

MHK  

9.7%

N/A

Carpets and Rugs

Williams-Sonoma Inc.

WSM

30.4%

26.5%

Retail - Home Furniture, Furnishing and Equipment Stores

Leggett & Platt Inc.

LEG

15.8%

14.6%

Household Furniture

Helen of Troy Ltd.

HELE

10.3%

N/A

Electric Housewares and Fans

Aaron’s Inc.

AAN

13.8%

7.2%

Services - Equipment Rental and Leasing

Tempur Sealy International Inc.

TPX

15.2%

15.1%

Household Furniture

Johnson Controls International PLC

JCI

11.4%

8.4%

Misc. Business Services

Tri Pointe Group Inc.

TPH

11.4%

6.3%

Operative Builders

USG Corp.

USG

9.5%

5.8%

Concrete, Gypsum and Plaster Products

Source: The Shareholder Forum

If fewer than five years of data is available for a company, the average ROCC used for the comparisons in the table is for the number of full years of data available. If there is no average ROCC number available for a company’s competitors, it means there are fewer than four other publicly traded companies within that SIC group.

You can review more detailed ROCC data for each company here.

 

Philip

van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

 

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