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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: patron_anejo_por_favor who wrote (31290)4/28/2005 8:11:50 AM
From: Perspective  Read Replies (3) of 110194
 
Somebody said the homies were all cash flow negative, and I couldn't believe it. So, I checked, and it looks like that is basically true.

With the lone exception of NVE, they all have zilch for cash flow. Every dime of net income is generally plowed back into bulging inventory. Which wouldn't be too bad if housing prices only went up.

So I figured a good way of gauging the sensitivity of their valuations to the price of real estate was to tally an inventory-to-equity ratio. It's a pain, cuz I can't seem to find anywhere to get bulk reporting in spreadsheet format of inventory and equity.

Anybody got ideas to make this easier on me?

Of those that I've reviewed, HOV looks terrible, with inventory-to-equity of 2.4:1. In other words, a mere 10% slide in the value of that inventory would result in a 24% reduction in their equity, wiping out years of "earnings". Or, a 40% slide in the value of their inventory ala Japan would completely wipe out their equity.

In this context, those PEs of 10 don't look so cheap anymore. Price-to-book and inventory-to-book are the relevant numbers in a real estate slump. The product of the two would seem to yield a measure of stock price sensitivity to RE pricing:

PB*IB

Since a 10% slump in RE could produce a 24% slump in HOV book value, and if the stock price is 2.5x book, one would expect the stock sensitivity to be 2.4 X 2.5 = about 6:1 vs. RE pricing, correct?

BC
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