Homebuilding Is Booming ... in Mexico

Since the onslaught of bad news began for investors in homebuilding stocks, we've seen a few scattered turnaround stories. MDC Holdings (NYSE:MDC), for example, has returned 21.46% since we recommended it last September in Motley Fool Hidden Gems. But most of the mid-cap homebuilders, including DR Horton (NYSE:DHI), KB Homes (NYSE:KBH), and Toll Brothers (NYSE:TOL), haven't been quite as fortunate. All three are still down approximately 50% from their all-time highs.

South of the U.S. border, though, Homex Development (NYSE:HXM) has a much happier story to tell. The Mexico-based mid-cap homebuilder, which focuses on serving the affordable-entry and middle-income segments of Mexico's new housing market, has experienced a fortune far different from those of its American counterparts: It has quietly prospered. The numbers tell the story.

Homex's volume has improved at an impressive 13.9% year-over-year clip. The company's revenues have surged in the past year, and it recently reported a 20% growth in its first-quarter revenues. Operating income improved by 18.3% and net income by 87.4% as tax recoveries and a sharp improvement in interest income played contributing roles in bolstering the company's bottom line.

So, what's going on? Why is Homex doing so much better than the typical U.S. homebuilder? A big part of it is the increased availability of long-term mortgages in Mexico, at reasonable rates. That's had a dramatic effect on this company's financial metrics, and the trend should continue to drive price appreciation for shareholders in the quarters to come. Motley Fool senior analyst Bill Mann referenced the phenomenon in his recent article "The Global Megatrend You Must Own."

There are a couple of possible risks to consider before you dive head-first into this stock, though. For starters, Homex's CEO recently resigned "to pursue new interests," and as investors know, any management shakeup can force a company into a transition phase. Fortunately, the incoming CEO has a history with Homex, having recently served as its chief strategic officer. That should make any transition period a little smoother and shorter.

Investors also shouldn't overlook the potential for changes in the economy, such as rising interest rates, tightening lending practices, or decreased demand for new houses. These factors have yet to come into play in Mexico, but the past two years in the U.S. should be a reminder of how quickly and dramatically conditions can change.

In the meantime, Homex has been able to provide a favorable forecast for the rest of the year. It recently reaffirmed its full-year fiscal guidance for revenue growth of 17% to 20% for fiscal 2007 and an EBITDA margin percentage comparable with its first quarter. And that confidence alone -- coming at a time when most of Homex's U.S. counterparts can offer only pessimism -- may be the strongest reason to own this stock.

So if you got caught up in the hysteria that accompanied the run-up in homebuilding stocks in 2005, but you've been somewhat hesitant to jump back into this sector because of its subsequent crash and burn, you might want to consider shifting your focus to an option that lies south of the Rio Grande.

Which homebuilders do you think will return to prominence? All of them? None of them? Let more than 30,000 rated investors know your opinion in Motley Fool CAPS, the Fool's community-intelligence stock-rating service.

Fool contributor Billy Fisher does not own shares of any of the companies mentioned. The Fool has a disclosure policy.