As readers might have noticed from some of my past articles, I remain unabashedly bullish about the growth prospects of emerging markets. Whether it be the oft-talked-about BRIC countries -- Brazil, Russia, India, and China -- or less-touted nations such as Chile or Vietnam, emerging market economies are chugging along nicely with the World Bank's Global Economic Prospects 2006 report expecting collective growth to remain above 5.5% for both 2006 and 2007.
While each developing nation has its own drivers of growth -- i.e., Russia is benefiting from its vast energy reserves, China is reaping the rewards of being the world's manufacturing center, India is the King Kong of outsourcing, etc. -- one common development is that strong economic growth is creating a rapidly expanding middle class in emerging market countries worldwide.
In my Foolish opinion, this is where the opportunity lies . to invest in emerging market blue-chip companies that will benefit from the increased demand generated by these newly enriched consumers. In recent commentaries, I have touched on a few of these plays, ranging from Latin American cell-phone giant American Movil
Guess what? I believe it's time add another company to that list, a company that caters to the ultimate desire of the upwardly mobile consumer: homeownership. I'm talking about Homex Development Corporation
I know that the noted Argentine economist Raul Prebisch once said, "When the U.S. economy gets a cold, Latin America gets pneumonia," but Homex certainly seems to have been taking its vitamin B.
Putting up some strong numbers*
For the second quarter ended June 30, 2006, Homex reported that it had sold some 10,603 homes and raked revenue of roughly $254 million, increases of 88% and 76%, respectively, from the second quarter of 2005. Net income came in at $30 million, up 48%, as strong gains in gross, operating, and EBITDA margins were somewhat offset by an increase in net interest expense as a result of the $200 million Beta acquisition and the issuance of new debt in late 2005.
(Note on the debt issue: The issuance of $250 million on secured senior notes was actually a positive, since the company replaced much of its short-term, higher-interest loans with lower-rate notes due in 2015. As a result, the company has reported that the average maturity rose from 2.5 years to 8 years and that it has no significant payments due until 2009.)
I'm aware that these results don't form an apples-to-apples comparison, since this quarter's results also include the operations of Casas Beta -- a competitor acquired by Homex in July 2005 -- but analysts' estimates had already factored in the acquisition, and both numbers came in significantly ahead of Street expectations of $221 million and $0.47, respectively.
Just to cover all the bases, we'll take a quick look at Homex's pro forma results (which assume Beta's inclusion in both quarters). On that basis, home sales rose 18%, revenue climbed 24%, and net income jumped 28%. Those aren't shabby results in my book, especially when the shares are trading at 15 times soon-to-be upwardly revised fiscal 2006 estimates of $2.53, a 25% discount to Homex's projected long-term growth rate.
It goes without saying (but I'll say it anyway) that one quarter does not a trend make. However, after taking a peek at the outlook for the Mexican housing market and reviewing Homex's past operating history, I believe that investors might consider building a position in this stock.
Outlook for the Mexican housing market
In simple terms, the outlook for Mexican homebuilders is bright. According to government estimates, there was an estimated housing shortage in Mexico of roughly 4.3 million homes in 2001.
In order to address this issue, the Mexican government -- flush with oil receipts -- has been loosening up the purse strings of government-funded mortgage operators like 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 be turned off anytime soon, as evidenced by the fact that the government committed itself to building/financing more than 750,000 homes in 2006 alone.
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 bread-winning 20-49 year-old age group in 2000, a number that is expected to grow to more than 46 million by 2020, with a commensurate increase in housing demand.
See some potential for growth here?
Building on a solid foundation
Homex, formally known as Desarrolladora Homex, S.A.B. de C.V., is the second-largest homebuilder in Mexico in terms of units sold (behind Bolsa-traded GEO), and it's the leader in terms of profitability. In fiscal 2005, the company sold approximately 31,000 homes and reported revenues of $755 million and profits of $88 million, up 51%, 55% and 34%, respectively, from 2004.
As you can see, Homex's recent results were not a one-time occurrence. In fact, according to the company's documents, Homex has been consistently trouncing its three main Bolsa-traded competitors (GEO, URBI, and SARE, for those interested). For the three years ended Dec. 31, 2005, Homex boasted a compound annual revenue growth rate of 72%, compared to the average 21% rate managed by its competitors, and a compound annual increase in net income of 76%, well ahead of the 42% average gain of its rivals.
Obviously, the company has its act together, and with a land reserve of close to 26 million square meters (or 2.5 years worth of production at current rates), Homex has room for further top-line growth, especially when you consider that it controls just 6.6% of the overall housing market in Mexico. Additionally, with Homex's proven operating efficiency (its margins are best in the sector and management continue to improve them), I believe that profits will continue to surpass Street expectations.
Valuation
As I stated before, shares of Homex trade at around 15 times conservative fiscal 2006 estimates, a 25% discount to the company's projected long-term growth rate. Considering the positive outlook for the Mexican housing market, the company's proven growth record and possible further margin improvement, I would suggest that long-term investors consider building a position in shares of Homex.
*Calculations are made using $1 = 11.307 pesos
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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 N.Y. Giants, or pondering the vagaries of life (pretty unsuccessfully up to this point). He welcomes your feedback. He does not own shares in any of the companies mentioned above. The Fool has a disclosure policy.
