(By Tim - iStockAnalyst Writer)
In the U.S. homebuilders are in the middle of a tremendous downturn with a true rebound nowhere in sight. Yet homebuilder stock prices have been rebounding. Last week when Lennar (NYSE:LEN) announced that their 4th quarter loss was only $811 million compared to $1.3 billion a year earlier, the stock price had a nice little pop and the shares are up almost 300% from their November lows. I, however, like to invest in companies that are actually making some profits. Preferably growing those profits. If we want to invest in homebuilders and profitable ones, a good place to look is south of the border.
Two Latin American homebuilders are showing excellent growth and recent share price reductions make them compelling values.
Homex Development Corp. (NYSE:HMX), is a Mexican homebuilder that has developments in 34 cities and 21 states (out of 31) in Mexico. Through the first three quarters of 2008 the company has sold almost 40,000 homes, about 10% more than for the same period in 2007. Their business model requires a home buyer to obtain financing and pay Homex their down payment before construction is started on their home. Over 90% of the homes sold are in the affordable-entry category. The average price of all of the Homex homes sold in the 3rd quarter was about $24,000. Most mortgages in Mexico are provided by government run companies funded by mandatory company or member contributions to public funds. At the end of September the company had a land bank of approximately 5 years worth of sales. Homex had an EBITA margin in the 3rd quarter of 23.9%. For 2009 the company is forecasting revenue growth of 8% to 10% and EBITA margin of 23% to 24%. Consensus earnings for 2009 are $3.95 per share, giving a forward PE of 5.8.
Gafisa, S.A. (NYSE:GFA), is a Brazilian homebuilder selling homes in 40 cities in 18 of Brazil's 26 states. In Brazil most new homes are apartments in high rise buildings. For the 1st 9 months of 2008 the company's revenues were 41% higher than 2007 and net income more than doubled. During the first 3 quarters new project launches doubled, paving the way for continued strong growth. Gafisa has a unique method to increase their land bank. They do not pay the landowner for the property up front. Instead they give the property owner either a percentage of proceeds when units built on the land are sold or they swap some of the completed units in exchange for the value of the land. With this tactic they have almost no capital tied up in raw land. GFA is currently trading at 6.5 times projected 2008 earnings of $1.32 ($1.08 is already in the "bank") and the consensus for 2009 is $1.44 in earnings. I believe the growth for 2009 will be significantly more than the 10% indicated by the 2009 guesstimates. Only 2 analysts follow the stock.
The two biggest risks for U.S. investors in these companies are the exchange rates between the dollar and the local currency and market perceptions about emerging market prospects. Holders of foreign stock ADR's do better if the dollar is weakening against the local currency and lose on the exchange if the dollar is stronger. Market perception of the emerging markets is an even stronger influence on share prices as these market tend to be pushed higher and lower in mass and perceptions change. It is tougher for individual stocks to rally when the local markets are not doing well. If you believe that the economies of Mexico and Brazil can continue to grow, HXM and GFA will be big beneficiaries of that growth.
