You'll have to forgive investors in Homex Development
Given this strong move, you'd think that shares of Homex would be pricey, right? Well, that's not the case, at least relative to its peers. Despite the run-up over the past year, shares of Homex currently trade at 19 times fiscal 2007 earnings estimates, more than a 10% discount to the company's projected long-term growth rate. To put this number in perspective, American-based homebuilders such as Toll Brothers
Now, I realize that emerging-market companies generally trade at a discount to their developed-world counterparts, but that's a pretty ridiculous valuation gap, especially in light of Homex's recent results. For the third quarter, which ended Sept. 30, Homex reported that it had sold 11,108 homes and raked in revenue of roughly $291 million (for currency translation purposes, $1 = 10.99 pesos) -- increases of 11% and 26%, respectively, from the third quarter of 2005. Net income came in at $42 million, up 48% over last year's quarter, driven by margin improvement as well as increased volume in homes sold.
Let me be clear: Homex's recent results were not a one-time occurrence. In fact, according to company documents, Homex has been consistently trouncing its three main Bolsa-traded competitors: GEO, URBI, and SARE. For the three years ended Dec. 31, 2005, Homex boasted a compound annual revenue growth rate of 72% versus the average 21% rate managed by its competitors, not to mention a compound annual increase in net income of 76%, well ahead of the 42% average gain of its rivals.
Pretty impressive stuff, eh?
Well, so is the outlook for the Mexican housing market. As I noted last summer, the Mexican government -- flush with oil receipts -- has been loosening up the purse strings of government-funded mortgage operators such as INFONAVIT, FOVISSTE, and SHF. These three operators, which supply virtually all mortgage financing to the general public, have increased their spending by some 81% since the end of 2001. The spigot is unlikely to get turned off anytime soon, as evidenced by the new government's recent commitment to financing 5.5 million entry-level homes over the next six years, up from a record 750,000 in 2006.
Think there will be a housing glut? Think again. A survey by the Mexican Population Council showed that there were 31 million Mexicans in the breadwinning 20- to 49-year-old age group in 2000, a number that is expected to grow to more than 46 million by 2020 with a commiserate increase in housing demand.
Hmm ... think there's some potential for growth there?
Homex certainly thinks so, sporting a land reserve of roughly 26.5 million square meters (or 2.5 years' worth of production at current rates) while holding options on an additional 25 million square meters of land. Who can blame them for this bullish position, especially when you consider that the company holds less than 7% of Mexico's fragmented housing market?
If you're still on the fence about Homex, consider this: Management recently provided guidance for revenue growth of 17%-20% in 2007, with EBITDA margins of roughly 24%. Based on this conservative guidance, earnings are expected to come in at $3.13 per share, a 25% increase over 2006. Now, I'm not saying that you should take out a second mortgage to purchase shares in Homex, but I do suggest that investors seeking a little diversity in their portfolios dig up the company's financials and take a look.
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Fool contributor Will Frankenhoff is enjoying his time writing for the Fool more than reading The Financial Times, rooting for the Jints, or taking a nap. He welcomes your feedback. He does not own shares in any of the companies mentioned above. The Fool has a disclosure policy.
