Description

Century Communities (“CCS”) is a Colorado-based homebuilder principally engaged in the acquisition, entitlement and development of land in Colorado, Texas, Nevada and Georgia. The firm was formed in 2002 and is run by Dale and Robert Francescon, who together own approximately 26.8% of the business. Prior to founding CCS, Dale and Robert were division heads at DR Horton, responsible primarily for the homebuilder’s activities in Colorado. CCS shares were listed for trading on June 17, 2014 at an IPO price of $23.00 per share and currently trade at ~$15.50. CCS has, in some ways, been a victim of its own success. Having grown rapidly in the past few years, the firm has been unable to meet analyst’s overly-optimistic expectations. This, combined with a lofty IPO price and a relatively small float, set the stage for CCS to underperform. Since its IPO, CCS shares have lagged XHB by approximately 33% on a total return basis.

While we do not profess to know how the homebuilders will fare in the coming years or whether home prices will rise or fall, we highlight CCS as a small, high-quality, high-growth builder that has lagged its peers in a dramatic fashion and trades at or below the low-end of the peer group on a tangible book and earnings basis. With analysts having meaningfully reduced what, in our view, were overly-optimistic forecasts in the last few months, we believe that there will be less noise around quarterly results and an increased emphasis on the strong underlying performance and significant discount vis a vis the peer group.

Brief Company Overview

CCS was founded in 2002 and operated principally in Colorado until two years ago. In May of 2013, the company completed a private offering (144A) to place 12,075,000 shares for net proceeds of ~$223.8mm. Proceeds were used for debt repayment, lot acquisition, development and for the acquisition of Jimmy Jacobs Homes and Las Vegas Land Holdings. These acquisitions represented CCS’ first material expansions into markets outside of Colorado (Texas and Nevada). In May of 2014, CCS issued $200mm in senior unsecured notes due 2022 at 6.875%. This issuance was followed closely by the company’s IPO on June 17, 2014 at a share price of $23.00. The company issued 4,000,000 in new shares for net proceeds of ~$83.7mm. Proceeds were used, among other things, to finance the acquisition of Grand View Builders in August, 2014 and Peachtree Homes in November, 2014. The firm most recently closed a $120mm unsecured revolver in October, 2014. The company has approximately $166.7mm in liquidity at the end of 3Q14, pro forma for its acquisition of Peachtree Communities.

As of December, 2014, CCS operated in four states (NV, TX, CO and GA) with over 11,569 owned and controlled lots across 143 selling communities. The below table represents CCS’ lot position as at September 30, 2014:

We could continue to expand on the company’s operating history, but CCS provides significantly more information about the company’s history, current footprint and expansion plans in regularly updated investor presentations (https://www.snl.com/Cache/1001192652.PDF?Y=&O=PDF&D=&FID=1001192652&T=&IID=4535992). Information pertaining to individual selling communities can be found in abundance at each of CCS’ branded sites (Century Communities, Peachtree Communities, Jimmy Jacobs Homes and Grandview Builders).

Homebuilding Peers

We will not try to over-complicate a simple thesis – CCS is a rapidly growing (organic and inorganic) operator in reasonably attractive markets that trades at a steep discount to the peer average P/E and P/TBV. This despite its strong management, comparatively pristine balance sheet and attractive growth trajectory.

CCS currently trades at a significant discount to its peers on both a BV and EPS basis. Presented in the table above are current analyst estimates as well as recent operating metrics for the peer group and CCS. CCS shares are currently trading at a ~43% discount to the peer average on a P/TBV basis and a ~46% discount to the peer average on NTM P/E. We’ll examine both briefly outside of analyst estimates below, beginning with book value.

Book Value

CCS currently trades for approximately 0.95x its tangible book value. We believe that the most recent Peachtree acquisition will be done with minimal goodwill and do not expect this figure to change materially. Our work gives us reason to believe that more than half of the current inventory was acquired via competitive auction or other market processes since 1Q14 and, given reasonably stable market prices, represents a fairly accurate estimate of the fair market value of the current book. We view the timing as important as we have encountered builders with older inventory where book value is arguably a less relevant measuring stick for fair value. Peers trade at a multiple of TBV ranging from 1.06x-1.81x with a mean and median of 1.65x and 1.77x, respectively. The discount to the low and high end of this range is 11% and 47%, respectively. We have struggled to find a justification for this discount beyond CCS’ relatively small float. CCS is on pace to grow top-line revenue at 90%+ in 2014E and grew top-line revenue at 80%+ in 2013E. This compares to peer top-line growth ranging from 20-30% in the same period. While a significant amount of this growth is inorganic, CCS remains under-levered relative to the peer group and maintains more than sufficient liquidity to continue integrating regional builders. CCS also continues to put up gross and operating margins in-line or above the national averages with higher new-order growth as well.

Earnings Power

We believe a significant part of the problem with respect to CCS’ recent performance lies with overly-optimistic analyst expectations. Management is pursuing an aggressive expansion strategy and one does not need to look far to find that strategy embedded in the street’s numbers. The problem is that such acquisitions do not always come when or where or in the size you might expect. Add to this the street’s fondness of extrapolating recent performance and it’s easy to see why a homebuilder with several quarters of strong performance might be set up to miss. Our focus, however, is on the underlying business which, even in the absence of further acquisitions, appears cheap. If we consider CCS’ current backlog with no ASP appreciation, backlog conversion in-line with its recent history, and margins/new-orders comparable to the peer group, we can roll the business forward and get to ~$1.74 of EPS in 2015E. While this number is still meaningfully below (~24%) the street (and far further below where the street was a few months ago), CCS is still quite cheap to the peer group:

At the peer average 12.3x 2015E EPS, this pro-forma scenario would value CCS shares at ~$21.4, a ~38% premium to its most recent trading level of ~$15.50. In this scenario, there is more than enough room to provide some small margin for CCS being a smaller and/or less liquid operator. Importantly, this scenario does not contemplate any consideration to future acquisitions. The company has more than sufficient liquidity (and room to add leverage) to consummate an additional Peachtree-size acquisition which we believe could add a further $0.50-$0.60 in EPS over the course of the next 12-24 months. Given the pace of recent acquisitions, it would not surprise us to see something sooner, rather than later. CCS nevertheless continues to trade at the bottom end of homebuilder valuation spectrum.

Concluding Thoughts

We view CCS as a strong homebuilder led by an experienced (20+ year) management team that is strongly aligned with shareholders (~27%) ownership. The company is under-levered relative to its peers, has grown revenues faster than its peers and maintains in-line or higher operating/gross margins with faster new-order growth than its peers. Despite all of this, CCS shares trade at a substantial discount to the peer group (40+%) on both a tangible book and earnings basis. Although we believe that the firm will use its ample liquidity runway to continue making accretive acquisitions, we believe the base business will conservatively generate $1.74 in 2015E EPS and that applying the peer average multiple of 12.3x is reasonable, for a target price of $21.4. The multiple, in our view, fairly balances the option-value of accretive acquisitions against CCS’ relatively small float, size and other risks.

Catalyst

*Analysts re-rate lower and market is able to evaluate CCS core business on relative-value basis with accretive acquisitions as upside optionality

*CCS continues to make accretive acquisitions, integration of recent acquisitions provides meaningful EPS accretion