Green Brick Partners Offers Value

Seeking deep value from US market during the last years has not been the most profitable investing idea. Average results have not been encouraging. You should fish where the fish are, and Asian market has offered much broader – and what’s the most important, more quality – deep value or net-net stocks.

In Texas, Georgia, Colorado, and Florida active homebuilder Green Brick Partners could be an exception to the rule. When many North American deep value and net-net stocks are making losses and burning asset value year after year, instead Green Brick Partners has been profitable since 2014.

Green Brick Partners is diversified home builder with eight brands in four major markets. The company owns land lots and also owns four other homebuilders through 50% controlling interests. They then sell the lots and provides lot acquisition and vertical construction financing to their controlled builders. This uniquely structure gives them a lot of flexibility.

Green Brick Partners is especially strong in Dallas and in Atalanta. Particularly Dallas is one of the strongest housing markets in US. Because of strong job growth and limited available homes, both Dallas and Atlanta need more homes and Green Brick Partners should earn very good returns from these great housing markets, which are backed by excellent long-term demographic trends.

The company valuation, measured with any indicators, is low. Green Brick Partners’ P/B is 0.9 and it is traiding under its tangible book value. Ok, this is not uncommon among homebuilders, but mostly they are heavily indebted and as such have greater risk profiles. Although, Green Brick Partners has increased its debt burden last years debt-to-equity ratio 0.43 is safe and under the control. Their conservative financial leverage allows Green Brick Partners to continue high margin growth. On top of that, the company’s book value is probably understated because of quickly risen land prices. This land asset is conservatively gauged easely about $9 per share alone and no value for profitable homebuilding platform which earned over $50 million of profit in 2018.

Other traditional metrics also refer to undervaluation. The company’s P/E is 9 (average has been over 15), P/S is 0.7, this is below the highs for this stock in particular over the past few years and EV/EBIT is 8.7, but ROE is over 11%.

Why then the company’s stock price plunged late last year? There were probably many reasons behind it from weather and labor shortages to prolonged home closings. Anyway, Green Brick Partners missed earnings in the third quarter 2018. And in addition, the company’s management seethe, which led to that they parted ways with the chief operating officer. After all this the stock halved itself from almost $12 to $6 per share. The general market turmoil also did not improved the situation.

Much has changed since then, and Green Brick Partners just had best first quarter in company’s history with the 33.3% increase in homebuilding revenues, record first quarter home closings, and a record $12.6 million net income. The company’s recent earnings estimates have been encouraging. This has had a positive impact on the consensus estimate.

In the case of Green Brick Partners, you cannot forget the company’s ownership. Well-known and respected value investor David Einhorn’s Greenlight Capital owns nearly 48% of the company’s stock. David Einhorn is also Chairman of the company. Another strong person is CEO Jim Brickman (over 8% ownership) who has nearly 40 years of real estate experience. They both have really skin in the game.

Also worth mentioning is heavy insider buying during the last year. There have been CEO, CFO and head of land acquisitions among the buyers, and other insiders own about 9% of the company.

Although Green Brick Partners seems to be an inexpencive purchase and compelling pick, it should be remembered that home building is a cyclical industry and even the best companies can’t avoid inevitably downturn at some point. And this company is also not immune to a possible general market recession.

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