At Home with John Buckingham

05/26/2006 12:00 am EST

Focus:

John Buckingham

Editor, The Prudent Speculator

Writing from The Money Show Las Vegas, John Buckinghamwhose Prudent Speculator has the top 25-year performance rating among all newsletter portfoliosoffers his update on housing and looks at both an old and a new favorite in the sector.

"At our booth in the exhibit hall, I had a spirited discussion on the housing sector with one of our recent subscribers. Armed with a new report that homebuilders are as pessimistic as they have been in the past 15 years and with the knowledge that interest rates have been on the rise, he wanted to know why we would still be recommending stocks in this sector. After all, he concluded, everyone knows that the housing market is slowing down.

"Though I readily admit that the homebuilders have been dismal performers of late and over the past year or so as well, even as we are still up several hundred percent on many of our long-time recommendations, I continue to believe, especially today, that the large, geographically diversified companies are priced at bargain basement levels that discount a far greater decline in their near- and long-term prospects than most analysts are presently predicting.

"Certainly, I realize that in the short run investor sentiment often trumps fundamentals, but I'm convinced that demographic trends, land constraints, market share gains, and margin enhancement are all factors that support continuing growth of the main players in the industry. One of my favorite stocks, D.R. Horton (DHI NYSE) remains on track to post its 29th consecutive year of record revenue and earnings. The homebuilding biz has historically been very cyclical, but a p/e ratio of 5.5 for a company that has posted 28 straight record years hardly seems justified!

"Given the continued weakness in the homebuilders, it is a fine time to name another housing stock as a Hotline Special and here we nominate M/I Homes (MHO NYSE), a builder of single-family homes and townhouses to the first-time, move-up, empty-nester, and luxury buyers names. Under the M/I Homes, Showcase Homes and Shamrock Homes trade names, it sells in nine geographic markets: Columbus and Cincinnati, Ohio; Tampa, Orlando, and West Palm Beach, Florida; Charlotte and Raleigh, North Carolina; Indianapolis, Indiana; Delaware, and the Virginia and Maryland suburbs of Washington, DC.

"Although the results did not meet expectations, last month MHO posted first quarter net income of $1.14 per share, versus $1.16 in the year ago period. The company also reported that backlog of homes at the end of the quarter hit a record high sales value of $1.1 billion, with average sales price increasing 13% to a record high $346,000 and backlog units increasing 4% to 3,112. New contracts climbed 5% to 1,137 and the company had 155 active communities at March 31, 2006, compared to 130 at March 31, 2005.

"MHO CEO Robert H. Schottenstein, commented, ‘Given the strength of our record-setting backlog and our current expectation of delivering approximately 4,750 homes, we believe 2006 will be our 11th consecutive record year producing record diluted earnings per share ranging between $7.55 and $7.75 this estimate reconfirms our previous guidance.’ In our view, with the stock now priced at just five times that earnings estimate, 41% of revenue and 90% of tangible book value, we would look to buy MHO up to $42.87 for long-term price targets of $80 to $86."

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