Century Communities, Inc. (CCS) reported third quarter earnings on the evening of November 5th at the tail-end of a particularly challenging time for the stock. Going into earnings, CCS was down 35% from its 52-week and all-time closing high set in early September. CCS is still up 7.5% for the year, but the recent earnings report did nothing to suggest that the stock can regain recent highs anytime soon.
Source: FreeStockCharts.com
I read through the earnings report and listened to the conference call (just 26 minutes long). For the prepared remarks, management spent 15 minutes mainly reading from the press release. Management spent the remaining 11 minutes answering questions from four analysts.
Headline results were strong but tightened guidance meant a reduction in potential upside for this year. From the press release…
“Based on the Company’s current market outlook for the full year 2015 it now expects home deliveries to be in the range of 2,350 to 2,500 homes and home sales revenues to be in the range of $700 million to $750 million, excluding the potential impact of any future acquisitions. At the end of the full year 2015, the Company anticipates that the active selling community count will range from 90 to 95 communities.”
CCS raised guidance during the second quarter earnings announcement:
“Given our positive results in the first half of 2015, we are increasing our full year 2015 guidance. Based on our current market outlook, for the full year 2015 we expect our home deliveries to be in the range of 2,200 to 2,600 homes and our home sales revenues to be in the range of $700 million to $800 million, excluding the impact of any future acquisitions. At the end of the full year 2015, we continue to expect our active selling community count to be in the range of 80-90 communities.”
So, CCS turned out to be over-optimistic and premature in pushing the potential upside higher. In turn, this tightened guidance looks like a disappointment even with the raised floor. Despite this, I continue to hold CCS given its extremely attractive valuation, especially relative to the longer-term potential of the company: 11.6 trailing P/E, 6.8 forward P/E, 0.6 price-to-sales, and 1.0 price-to-book (data from Yahoo Finance).
My main reservation on CCS remains the acquisitive nature of the company’s growth strategy. Management once again confirmed its commitment to this strategy. The company continues to look for (land) acquisitions in markets with strong job growth, household formation, and limited housing supply. These criteria are pretty much standard now for most publicly traded homebuilders. The company expects M&A (mergers and acquisitions) activity to continue to drive part of its growth. Management stands on its record of accretive acquisitions. It notes that it still sees good opportunities to put capital to work and is well-positioned to further diversify footprint in a profitable manner.
I am not clear on how future deals will get done – debt, share offering? Cash now stands at a mere $12.8M. Total assets are $860M versus $465M in liabilities. Compare this to LGI Homes, Inc. (LGIH), a regional builder with some overlapping markets. In its last earnings report, LGIH reported $36.4M in cash, $547M in total assets, and $323 in liabilites. Cash is more than 10% of liabilities for LGIH whereas this ratio is just 2.8% for CCS. The assets/liabilities ratio is higher for CCS. CCS has a much smaller market cap of $396M versus $606M for LGIH. (I will update my outlook on LGIH in a future piece).
CCS’s most recent acquisition brought in a large business in Atlanta. As I stated in my last CCS summary, the company’s success essentially hinges on the Atlanta market. The bulk of the large year-over-year gains CCS reports are from the Atlanta-based acquisition. The following commentary on growth drivers make plain the impact of Atlanta (my notes):
- EPS improvement driven by healthy pace of activity in recently acquired Southeast operations and strong results in Colorado and Las Vegas.
- Successful in opening new communities in incremental markets.
- ASP down 12% YoY due to mix from Southeast. Organic ASP increased 9% excluding SE.
ASP is the only metric or measure that CCS directly provides organic growth. The company does acknowledge that “some markets have cooled relative to a year ago.”
Atlanta now holds the company’s largest number of selling communities – 37 versus 33 in Colorado, CCS’s former core market. Atlanta produced 46% of all home deliveries, slightly down from 48% for all of 2015. Atlanta holds 51.6% of all net new contracts, so the concentration of sales in Atlanta should increase going forward. Unfortunately, Atlanta is a lower value business for CCS. For example, while 43% of CCS’s backlog is in Atlanta, only 30% of the value of the backlog is there. Atlanta has the lowest average sales price of CCS’s 5 regions (Atlanta, Central Texas, Colorado, Houston, and Nevada).
Here are the notes I took on management’s regional commentary (including snippets from the Q&A):
Atlanta
- An increasing mix of land inventory and backlog.
- Labor is tight but manageable.
- First-timers are a big driver.
- Have pricing power in Atlanta across ll sub divisions. (In other markets, it is by division.)
Colorado
- Overall market fundamentals remain stable.
- Opened 5 new communities.
- Been dealing with Colorado market for a few years so already included labor and trade issues in business plans and forecasts.
Las Vegas
- Growing deliveries and expanding margins.
- Stable traffic and demand.
- On track to open 5 new communities in 2016.
Texas
- Another quarter of moderating demand trends overall.
- Central Texas: San Antonio and Austin – mixed with healthy employment growth, severe weather, and labor constraints. Flattish market growth. ASPs have had strong run putting near-term pressure on price in high-end. There is some pick-up in October, but it is too early to tell whether it is a trend.
- Houston: Remains challenged near-term.
- Expect ASPs in Texas to continue to fluctuate based on product mix.
- Central Texas and Houston represent less than 11% and 4% of total lot holdings respectively.
- View Texas operations as long-term investments. But for now will keep investment dollars limited.
Note that CCS appears to have much better pricing power in Atlanta than its other regions. I think the commentary on Texas is particularly noteworthy. CCS has clearly tempered its expectations there and is trying to de-emphasize the importance of the market to its business. Atlanta will have to pick up the slack in growth and revenues.
I conclude with some other key points from the Q&A:
- Use 21.5% guidance for 4th quarter (exclusive of interest and purchase accounting)
- No permanent mix shift.
- Haven’t seen much change in incentive levels.
- October orders is continuation of what was seen in 3rd quarter; haven’t seen anything that has changed up or down.
- CCS is not immune to weather delays and labor issues.
- Timing, weather delays in 2nd quarter pushed off opening of communities to a later date.
- Always doing land acquisition. 3rd quarter just under 1000 of 1300+ lots from Atlanta where finished lots can be found. Some of other markets it is harder to find.
- Vast majority of potential deals don’t meet company criteria.
Be careful out there!
Full disclosure: long CCS