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Strategies & Market Trends : Value Investing

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To: Paul Senior who wrote (19763)	10/5/2004 11:06:48 PM
From: Spekulatius	Read Replies (2) of 78627

re home builders - it is time to be extremely careful with these stocks, IMO. The housing cycle looks like it is going to end. Las Vegas was the hottest market and it seems that the bubble is bursting. South CA is slowing down as well as it seems. There is a lot of speculation induced demand in the market that will quickly disappear, when home prices won't rise any more. Looking at PHM balance sheet YoY I see that cash is down and debt is up to finance the house inventory (6.6B$ !) which are roughly 2/3 of the balance sheet). Despite the housing boom, the company does not seem to generate FCF. The question is how much of the earnings is just appreciation if the house inventory, which in my opion should be accounted for as market to market gains rather than operating earnings. If I assume a rather lowly 10% appreciation gain for the inventory 680M$ of the 950M$ in operating earnings is due to market to market gains rather than the operating business itself. In other words, if the housing market were flat, about 70% of PHM earning would disappear, if my above assumptions are correct.

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