Finally, a Bullish Homebuilding Story

02/06/2012 9:45 am EST

Focus: GLOBAL

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Domestic homebuilders have been under siege for years, but beyond US borders, just to the south, the homebuilding market is still going strong, writes Paul Goodwin of Cabot China & Emerging Markets Report.

Although US mortgage bankers are loaning money about as freely as Ebenezer Scrooge, emerging markets are considerably more supportive of homebuilders.

So what makes Homex (HMX), a Mexican homebuilding company, look good enough to buy? There are three big reasons.

1. Scale
With operations in 34 cities in 21 Mexican states, Homex is one of the biggest homebuilders in Mexico. The company buys land, designs, builds, markets, and sells its own projects, including financing and community development.

It’s the unchallenged leader in the country’s four largest markets: the Mexico City metro area, Guadalajara, Monterrey, and Tijuana. The company’s operating footprint gives it access to 77% of Mexico’s population.

At the beginning of 2011, Homex had nearly 20,000 acres of developable land in inventory, which was adequate for about five years of normal operations. But as part of the company’s conservative land-replacement policy, the company is in the process of reducing that reserve to about 3.5 years’ worth.

2. Market Focus
Homex made a decision early on to emphasize entry-level housing, and 93% of the units constructed in the first half of 2011 were affordable homes that sold for between $16,500 and $45,000.

Revenue from these projects contributed about 81% of revenue. The approximately 5% of units sold in the middle-income range (selling prices from $45,000 to $112,400) made up 10% of revenues.

The focus on affordable housing is a direct response to the mortgages that are available (often with government support) and market demand.

3. Expansion
Since 2006, Homex has been building housing in Brazil, where a wide housing deficit—combined with government sponsorship for entry-level housing and a liquid mortgage market—create an ideal environment.

The company has completed three projects in Brazil, with nearly 6,000 units total. The economic outlook for Brazil is also a plus.

Homex has also expanded into the infrastructure business in Mexico, where its solid reputation makes it an attractive contractor for government projects. This division is already contributing over 6% of revenues.

And finally, the company has moved into the second home/retirement home market in key tourist areas. The first projects of this strategic push have come in Cancun, Los Cabos, and Puerto Vallarta.

The company is also exploring an entry into the affordable housing business in India. Over the years, Homex has refined its aluminum-molding techniques for concrete construction, and the speed and efficiency of its operations may present real opportunities in markets where the demand for higher density entry-level units is high.

Homex is covered by 20 financial analysts, which is a reassuring number for a nervous market. HXM made a major run in 2009, peaking at $44 in October, then began a long correction that looks to have bottomed just below $12 in late 2011.

The stock began a strong rally in December. Yet it still sports an attractive P/E ratio of just 8. Investors can buy a little now.

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