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The New Home Company - Small-cap homebuilder with attractive valuation

6/30/2015

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NWHM was founded in August 2009 by Larry Webb, Wayne Stelmar, Joseph Davis and Tom Redwitz who still hold a combined 20% of the company. Each of them has at least 25 years of real estate experience, and some of them have worked together in John Laing Homes, which they took private in a management buyout and later sold in 2006. New Home Company operates in California, mainly in SF bay and around Sacramento. As of December 2014, they owned 22 communities and 54 communities with their join ventures.

According to management, after real estate prices collapsed in 2008, they formed the company and bought several blocks of land for attractive prices. NWHM develops and owns some properties (37% of revenues), and also builds real estate for 3rd parties (63%). However, first segment is more lucrative with 15% gross margins, compared to 4-5% fees they collect in second one.

Basically, it is a home builder located in California, building and acquiring mainly communities, either on it's own or through joint ventures. Let's look at financials. 
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It is apparent that NWHM is growing it's top line quite fast, and this will accelerate in 2015 as they aim for $400 million in revenues. The company is expected to report a full year EPS of 1.35-1.45, giving it a forward P/E of around 12, and forward P/S of 0,7. For 2016, the situation looks again quite similar, where NWHM guided growth of revenue and EPS at 60% and 70% respectively. As of 31st of March, the stock had 50 million in cash, and 125 million in long-term liabilities. Company backlog grew around 5 times to $82 million in last quarter YoY, while backlog of joint ventures doubled in the same period. They seem to be executing their strategy well, and should be able to reach this year's targets easily.

US Housing market

Housing market is the cornerstone of every major economy. It's recovery has led US out of most major recessions, but this time it's really sluggish. New home sales are at levels seen during recessions in 1970s and 1980s, and house prices in certain cities still hover around 2012 lows, even though the average is steadily climbing up. Most home builders have lagged S&P500 performance in last 2 years (exception is Lennar, LEN), even though the housing market has quite improved. As a result, the whole group trades for low valuation multiples, with impressive growth rates. Situations like this offer great risk / reward ratios, and as such are very attractive investments. NWHM is the fastest growing public-listed home builder, with a great management (they made fun of each other on last conference call, too bad JP Morgan analyst didn't get the jokes), and a lot of potential. Bought the stock already with stop loss as usual. Good luck in investing!

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US New Home Sales
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House prices in US
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