As a value guy, I’m not really sure. If I were to take a stab at valuing a housebuilder, it would comprise of two elements. It’s sort of like valuing insurance companies, really:
a) Value the land on their book. This sounds trivial – we have accounting book values for a reason – but the actual sums are more complicated than that. Housebuilders have portfolios which faced differing degrees of impairment during the crisis, and the companies which had the financial strength to restart big land-buying programs in the depths of 2009/2010 – while everyone else was battening down the hatches and staving off the baying banks – have a portfolio of land which allows for higher margin building today. They also have differing quantities of land, which are best modelled by comparing their land bank (in number of plots) versus their last-year completions. This is like valuing an insurance company’s in-force book; you’re essentially asking yourself how well-written their previous policies were, or how well bought their previous land was, and how benign the environment will be for that profitability over the next few years.
In sum, all you’re doing is adjusting the value of their book to take into account the expected profitability of that land and when it’ll be built on – the discount factor. That’s why housebuilders – in the good times – show such great figures. Anyone can make money by buying land, sitting on it for 3 years (and watching it increase in value by 25%), and then building a house on it and ‘making 40% margin’.
For what it’s worth, this was why I bought Barratt in 2010. I flatter myself – I was a rookie investor armed only with 3 basic metrics and an overinflated sense of my own skill… but I was buying it at 0.3 times tangible book, after a number of write-downs. I think if I put myself back in that spot today, I still buy Barratt. You can put in all sorts of assumptions about profitability or lack thereof and feel comfortable when you’re buying it for that price.
What about when they aren’t available at 0.3 times tangible book, but at 1.2 – 2.5 (depending on what you look at), like today? Well, again, you should probably adjust that figure to remove all the noise.. but you’re still, in part, relying on:
b) Value the future profitability. Again, this is like an…
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