|Shares Out. (in M):||30||P/E||0||0|
|Market Cap (in $M):||900||P/FCF||0||0|
|Net Debt (in $M):||900||EBIT||0||0|
|Borrow Cost:||General Collateral|
Century Communities and other homebuilders are encountering an extremely challenging operating environment in which their input costs of labor and raw materials are rising faster than they can raise housing prices, as housing price appreciation is on the verge of slowing. Century and others are scrambling to avoid the margin compression but have few levers to pull. There may be some air pockets ahead for Century and other homebuilders in the next few quarters.
Who is Century Communities
Century has been one of the fastest growing homebuilders through mainly acquisitions Century has done eight acquisitions in the last five years. In May of 2018, the company was ranked as the #1 homebuilder by Builder magazine. Because of this fast growth and a backdrop of soaring housing prices, Century has outperformed other homebuilders by 44% in the last five years.
There is a very detailed report on the long side posted in February about the details of Century's operations, be sure to check it out.
New Home Sales Growth and Pricing Slowdown
New home sales are starting to turn sluggish. June’s report was disappointing with just a 2.4% increase year over year and previous months being revised downwards. A combination of rising interest rates, soaring prices and consumers hitting pause are causing some concerns. A recent post on Calculated Risk describes what some are seeing.
"A bit of a panic is breaking out amongst my Realtor friends. Sales are down. There are more cancellations right before closings than usual. Builders are getting a few drop outs as well on some of their units, but that could be tied to overseas buyers with other concerns. If this sales "air pocket" continues, we might see some Agents have to actually marketing, rather than just shilling their homes at the first buyer through the door. A few Agents have seen their listings grow long in the tooth, even some traditionally priced towards first time home buyers. That's a deja vu event today for 2013 vintage agents, but not so for old dogs like me.
On the mortgage side of things, more and more loans have begun funding in the upper 4's to low 5's. Customers are really chafing at anything priced above 4.75%. In order to expand volume, some lenders are duking it out on price while others are expanding their debt to income ratios, lowering the buying threshold, just as we saw back in 2006." ()
While this might be a temporary trend, it is worth noting.
Raw Material Costs
Lumber prices are up 20% in the past year alone, despite falling from record high prices when they were up 40% year over year. Due to a combination of strong demand and tariff increases, lumber has been hitting record pricing. To date this has not been a significant issue as builders such as Century have been able to pass along cost increases, but this is headwind to homebuilders.
There are severe labor shortages across the board in the trades. And due to extreme immigration enforcement and few people entering into basic trades, the situation is not going to get any better any time soon.
This article sums it up best:
To put the problem into perspective, there were 250,000 unfilled construction jobs at the beginning of the year, according to an NAHB analysis. The unemployment rate for the industry, reflecting unfilled positions, was 7.4% in March, according to a government data analysis by the Associated General Contractors of America, a trade group for commercial builders. That's significantly higher than the national unemployment rate of just 4.1%.
The dearth of construction workers is slowing down all stages of the business, says Jason Scott, owner of North Star Premier Custom Homes in Westlake, OH, and president of the local Home Builders Association.
“It takes me twice as long now to do an estimate as it used to,” he says.
Instead of being able to find workers that day, he now waits eight to 10 weeks. Delays due to overbooked contractors slow the pace of homebuilding, amplifying existing shortages.
The shortage is also inflating costs for buyers and homeowners. Scott has had several subcontractors (siding, roofing, concrete) raise their prices by at least 10% since the new year. He’s paying double what he was 10 years ago for framing.
This is yet another pressure to home builders like Century.
Land Development Risk
The reason for this report’s focus on Century is that personal real estate contacts have shared that Century has recently been trying to renegotiate on several land contracts to get lower pricing due to margin squeezes elsewhere. Land owners are being told “We can’t hit our margins with that pricing anymore.”
And this highlights a big risk to a homebuilder like Century. They are really just glorified marketing machines. They don’t develop land, but acquire it, they don’t employ a lot of people, but subcontract out a lot of the work, and just market homes.
For Century to continue their growth, they need to keep adding land. But the problem is there is also a shortage of lots, and it is getting worse:
It wasn’t until I heard about their desire to renegotiate deals that I started to investigate the company as a short opportunity.
Interest Rate Risk
Homebuilders are uniquely at risk to interest rates putting home ownership out of reach for most new home buyers. While interest rates have paused their recent climb, there is significant risk if interest rates resume their upward momentum.
Century has outperformed other homebuilders by aggressively acquiring other home builders in a rising price environment. With home prices plateauing, raw material and labor shortages pressuring the company, the company is trying to go back to land owners and pressure prices down, but they may not have much leverage.
With raw material shortages, labor shortages and land shortages, the company is at risk of hitting an air pocket over the next several quarters, especially since they have been so acquisitive over the last several years. I believe this is one reason the stock appears so cheap.
One final note is that the company has aggressively accumulated debt to pay for its acquisition binge. The company now has over $900 million in debt. It’s manageable for now but increases the risk profile of the company.
-weak new home sales
-missing earnings estimates
|Entry||08/10/2018 03:35 PM|
Do you think the market isn't aware of the margin pressures, or that they're underestimating them? Management rebased back-half margin guide on the 2Q call, so it seems like the company might have some wiggle room to come down off its recent adj GM highs without negatively impacting the stock.
|Entry||08/12/2018 05:34 PM|
Funny because there is a Century Communities property that I drive by that has been idle for six months except for a model home which is taking forever to finish, and I´ve been wondering what they are doing. I suppose there are many explanations. I do know that in that area, lot prices have doubled in the last two years.
Question: would land just be a better short? What if CCS got land prices down so they were made whole and the stock was fine? I´m guessing other builders are all in the same boat so land has, if I remember correctly, historically beared the brunt of much of price corrections. I am not aware of any home lot public equities so I´m guessing this is not actionable, but worth asking.
|Subject||Re: Market expectations|
|Entry||08/12/2018 07:55 PM|
You make a good point, however it can be surprising when acquisitive companies miss estimates, how much they can miss by.
|Entry||08/12/2018 07:56 PM|
My point is that homebuilders are being squeezed on all sides right now, labor, land and potentially pricing.