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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Craig Bartels who wrote (10984)	7/22/2000 6:54:24 AM
From: cpabobp	Read Replies (1) \| Respond to of 78530

I own and have owned a similar home builder in DHOM for several years and would like to add this perspective because it also seems to apply to NHCH. I'd say the biggest negative to these stocks and this industry relates to inventory and operating cash flows. It seems that while we are at a point in the economy that things are starting to slow down, interest rates are higher, less new homes are being constructed, but these home builders continue to invest millions in work in progress homes and land. They seem to take the assumption that real estate prices will always go up (which very well might be). As a result as interest rates remain at higher levels they are required to carry higher interest debt for longer periods of time. Look at the operating cash flows for NHCH for the past 2 years and you'll notice they can't generate enough cash to run operations and purchase all the land they want, so they rely on their idiot bankers to blindly lend them money. Ask management why "in a period that profits and revenue are growing and strong, why can they not generate enough cash to provide positive cash from operations for a single quarter?" The answer I got at the DHOM annual meeting from the CFO was "Uhh...really...I'm not sure, but I'm sure it will improve in the future because of increased profits" - These guys are idiots or maybe I just don't understand. What would you think of Ford or any other manufacturer that could not afford to buy the parts to assemble their product without borrowing money? It's ridiculous, even if it's the industry norm (hence my belief as to why the industry is so cheap right now). These companies also have to rely 100% on subcontractors in the local areas they work. Typically these large homebuilders consist of project superintendents and sales people. So they take a big risk by relying on certain subcontractors in current work regions and risk getting involved with less desirable contractors when they move into new regions. An example I've seen several times is that one of the companies major subcontractors runs into financial hardship, so these generous/(arogant) generals will actually pay higher prices up front to keep these contractors in business. (in one of the cases I refer to, the business owner of the sub actually used some of the cash injection to buy a nice new Cadillac). I consider this extremely dangerous to the industry, because they are condoning poor business practices. I am a believer that in a strong economy these companies should be idiot proof and they could return to prosperity. But a recession could also devastate the industry. I am also a long-term holder in a very small position in DHOM (for reasons other than financial gain..ie I would not recommend purchasing to anybody right now). Craig, you be your own judge.