Real Story: Look Who's Buying Homebuilders

It's scary to step in front of the speeding train that is the housing market decline.

Investors in homebuilder stocks have had their heads handed to them as the Philadelphia housing sector index is off 20% this year. Bubble-bursting data such as inventory gluts, fewer mortgages and slower home sales make investing in the group a treacherous task.

Yet that's exactly what several shrewd investors have been doing lately.

Take Emaar Properties, a real estate company based in Dubai. On June 1, Emaar said it would acquire privately held John Laing Homes for $1.05 billion in cash. John Laing has significant exposure to the California market -- which is believed by many to be frothy. An Emaar spokesman said the company was interested in the deal for its long-term value and wasn't worried too much about different cycles in the business.

John Laing recorded $1.6 billion in revenue in 2005, giving the deal a price-to-sales valuation of 0.65. Margaret Whelan of UBS estimates that the P/E on the deal was 6.4. As you can see from the table below, public homebuilders are trading at significant discounts to the Emaar transaction.

In particular, stocks such as Beazer Homes(BZH), Hovnanian Enterprises(HOV) and KB Home(KBH), all of which have taken a tumble through the first half of the year, look inexpensive when compared with the Laing transaction.

There's also the case of General William Lyon, the chairman and CEO of William Lyon Homes (WLS).

In March, Lyon made a tender offer for all the remaining shares (roughly 26%) that he or his trusts do not own. With the stock at $72 at the time, Lyon offered $93. He later raised the offer to $100 and finally to $109. Now the stock is north of $140, as its largest holder, Polygon Investment Partners, which has a 9.9% stake in the company, is clamoring that $109 isn't enough. Investors (or speculators) appear to be banking on General Lyon upping the ante, despite stating that $109 is his best offer.

Value Plays?
Symbol	Price/Earnings	Price/Sales
BZH	4.4	0.3
CTX	4.8	0.4
DHI	4.7	0.5
HOV	4.1	0.2
KBH	4.2	0.4
LEN	5	0.4
MDC	4.5	0.5
MTH	4.4	0.5
PHM	4.6	0.5
SPF	3.8	0.4
TOA	3.4	0.3
TOL	5	0.6
WLS	6.5	0.7
Average	4.6	0.4
Emaar/Laing	6.4 *	0.6
Source: Thomson. Valuations are based on trailing 12 months. * The P/E ratio for Emaar/John Laing is an estimate based on 2005 results