Green Brick Partners Q3 Earnings: It’s still cheap…

Green Brick Partners Q3 Earnings: It’s still cheap…

Green Brick Partners reported earnings this past week on November 6^th. For those of you who don’t know much about the company, here is a summary that Geoff wrote about the company back in September:

“Green Brick Partners is a homebuilder that is split close to evenly between Dallas Fort-Worth (it builds homes in places like Frisco, which is right by where I live in Plano) and Atlanta. I don’t know the Atlanta housing market. But, I do know the Dallas housing market. The stock trades at about 1.1 times book value. However, in the homebuilding industry, land is usually held for 2-5 years from the time a homebuilder buys it to the time they sell the finished house on that land. Land prices in Dallas Fort-Worth have risen, so the fair value of their holdings would actually somewhat exceed 110% of book value – meaning, the market value of the company’s assets is slightly greater than the market cap of the company. They have enough net operating loss carryforwards to not pay taxes for another 3-5 years depending on how much they grow earnings. The decision maker (Jim Brickman) is a good homebuilding guy and has a meaningful personal stake in the company. Together with David Einhorn’s Greenlight capital (about a 50% owner) and Dan Loeb’s Third Point (about a 17% owner) people who are insiders/long-term investors of some kind hold about 75% of Green Brick Partners. So, the float is probably no more than $125 million. The stock was, in recent memory, a speculative ethanol type company that was used as the public entity to take this Einhorn/Brickman homebuilding entity public. In investors’ minds, the company is probably not “seasoned” as much as it’s going to get in the sense that if I say “Green Brick Partners” today – you may not have recognized the name and if you did you may not have immediately remembered it’s a homebuilder and even if you did remember that you still might not have remembered where it builds home (Dallas and Atlanta). It’s underrecognized. If you buy the stock in 2017 and plan to sell it in 2022, you’ll probably be selling a bigger, more recognized stock with a higher price-to-book multiple that is then starting to pay taxes.

A homebuilder is not the kind of stock I’d usually buy. Green Brick isn’t a capital light pure homebuilder like NVR (NVR). Nor is it more of a marketing machine like LGI Homes (LGIH). It’s something that buys up land, holds it for up to five years, puts a house on it, and then sells the land plus the house. There’s no cash flow that doesn’t go back into buying up more land. Everything it does is tied to residential land values where it operates. So, this is purely an investment in residential land in Dallas and Atlanta. However, the combination of UNTAXED (for now) cash flow from homebuilding activities going back into buying additional land plus the annual appreciation of land while it’s on the balance sheet gets you to a good growth in Market Value of Land Per Share which is what the intrinsic value of the company obviously is.

Green Brick Partners is clearly very attractive relative to the market. The S&P 500 is trading at probably twice what it normally does. One times book is not above normal for a homebuilder that operates only in good metro areas. And then I feel sure that on a per share basis Green Brick Partners will grow its book value faster over the next 5 years than the S&P 500 will grow its EPS. So, Green Brick definitely has higher growth and a lower price multiple than the overall market.

It’s an attractive potential investment. And I’d have to compare something like Green Brick to something like Cheesecake to something like Omnicom to decide which to buy.

I have been invested in the company for almost two years now. I put 40% of my portfolio in the company when it was trading at $5.89 per share, or a market capitalization of $287m. The company now trades at $11.20 per share with a market capitalization of $558m. My investment thesis summed up was, I was buying a superb company with a strong management team that was operating in an industry with a unique business model and a strong tailwind for growth, all for below book value or inventory on a per share basis. Green Brick reported Q3 earnings recently and the stock initially rallied 6-7% after hours, only to sell off a bit the next day. The stock is no longer a 40% position in my portfolio, but is still meaningful and one that I think is still cheap today. Here are the highlights from Q3 Earnings:

Results for the Third Quarter Ended September 30, 2017:

Why do I think the company is still cheap? It is currently trading for 9.7x’s EV-EBIT, or 1.27x’s Book Value. I think the intrinsic value is in the neighborhood of $17-18 per share, which could still offer new investors a favorable IRR. Green Brick is laser focused on shareholder oriented growth and recently announced they are entering the Colorado market by acquiring a 49.9% ownership in Challenger Homes, a Colorado based Home builder. At the beginning of the year, Forbes declared the region Challenger Homes operates in one of the “10 Hottest Real Estate Markets to Watch”, which is similar to the markets Green Brick is already operating in.  If Book value can continue to grow modestly over the next few years and reach a multiple of 2x’s (which I believe is not aggressive due to the companies unique business model), the return for you will be great. As Geoff also wrote about above, the float in Green Brick is low so the stock can be volatile at times- which could offer a future opportunity to purchase the company at a lower price for you. In any event, it’s a business that should be on your watch list and one that could be profitable for your portfolio over the next few years.