Homebuilders: CTX, DHI, LEN, PHM

Talk about a depressed market. Housing glut, credit crunch, burst bubble...call it what you will, the real estate market is in disarray after the meltdown that has both affected and threatened the entire economy. This being the case, I thought I would take a look at some of the Homebuilders stocks - a whole group that has been totally rocked.

I decided to cover these from sort of a contrarian strategy. The market has been described as bipolar - bad information will send it into an overreactive depression, while good information will send it inexplicably higher. I am not saying that the Homebuilders are necessarily undervalued for the short term, I think it will be some time before this business is as profitable as it once was, and for obvious reasons. It is basic supply and demand. When housing prices were rising at an unprecedented rate, more and more people jumped into the home building business. The faster you could build them, the more money that could be made. This led to oversupply, which in turn led to thousands of houses sitting on the market. My theory is that the market will make an adjustment back in the other direction. The weakest companies will go out of business, while the strongest companies will persevere until there is a greater demand for new housing again. Enough of my editorial, let's look at the stocks.

I am going to compare 4 of the largest homebuilders - Centex (CTX), DR Horton (DHI), Lennar(LEN), and and Pulte (PHM).

P/E and PEG ratios
Centex reported a 644M quarterly loss today. All the companies are losing money. Their houses aren't moving, and prices are falling.

As far as the ratios go, this is a convoluted area because the companies aren't earning at all. They aren't earning and they aren't growing. They are losing money and shrinking. How do you figure a P/E for a company that just went 644M into the red? Hint: You end up with a negative number.

Basically, we can't evaluate these companies on this basis, traditionally one of the most popular for finding undervalued stocks.

Cash and Debt
CTX has 228M in cash vs. 5B in debt (ugh!).
DHI has just under 5M in cash vs. about 5B in debt (even worse).
LEN has 128M in cash and about 3B in debt.
PHM has 74M in cash and about 4B in debt.

Advantage - I don't know if you could say anyone has much of an advantage, but the numbers look a little better for LEN than the others. All of these stocks are going to have to possibly look into selling some of their assets in order to pay their debts. Not a promising outlook.

Dividends
I typically love stocks that pay dividends, and all of these stocks pay pretty decent ones. My question is - why are you paying dividends in your terrible financial state?

Price to Book Value
The stat that really jumps out at me is the Price to Book Value of these companies.

CTX: 0.64
DHI: 0.71
LEN: 0.71
PHM: 0.64

What this means is, all of these stocks are trading below the value of their current assets. That fact makes these companies potentially attractive in the future. If you can buy a dollar for 64 cents, it's usually a good idea. Of course, if the company goes out of business, then you just own a piece of paper.

Conclusion
I don't know when or if these stocks will rebound. I do know that at some point people will start building houses again. Whether it's these companies, or others that replace them, this isn't a sector that is capable of staying down forever. I think these stocks can potentially have value in the future. Now is the time to buy if you can find the right one. I don't think any of these stocks distinguishes itself based on the numbers, but now might be a good time to scoop up an undervalued company if you're willing to hold it for the long term. I'm not going to pretend to be able to predict a bottom. Good luck if you decide to gamble on the homebuilders.