2 for Tuesday: Build on a Bargain With Standard Pacific

Though the sector has had a good run already, this homebuilder still looks poised to move up.
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Have homebuilding stocks hit the ceiling?

Some already have. For example,

Toll Brothers

(TOL) - Get Report

is up more than 30% over the past two months.

Centex

(CTX)

, another big name in the industry, has nearly doubled to more than $50 since hitting a 52-week low of $28.03 on Sept. 21.

But bargains still remain in this group. Among my favorites is

Standard Pacific

(SPF)

, a builder of single-family homes on the West Coast. It closed Friday at $23.55, down significantly from its 52-week high of $33 set Feb. 6.

So what makes Standard Pacific so special?

Good Diversity

For starters, although the company isn't as geographically diverse as Toll Brothers, Standard Pacific builds homes in several states, including California, Texas, Arizona and Colorado. This diversity means that it doesn't depend too much on one metropolitan area.

The homes it offers vary in price from $125,000 to $1.5 million. That wide range gives it much more margin flexibility than a company that builds only high-end homes.

Homebuilders Heat Up
But Toll has had a better run than Standard Pacific

Standard's management team collectively owns roughly 4.1 million shares, or 13.4% of the outstanding stock, according to its proxy statement filed March 30, 2001. Those execs have a significant vested interest in maximizing the stock's value for common shareholders.

Confidence Ahead

Under a $35 million stock repurchase program authorized by its board of directors in April 2001, the company has bought back roughly $18 million in common stock. Management has said publicly that it intends to be in the market buying stock until it fulfills the authorization. The fact that a homebuilder is willing to lay out precious capital to buy back stock should signal to investors that, despite the economic uncertainty, the company remains well-positioned for future earnings growth.

The stock trades at only about 1.3 times book value and at 0.5 times sales -- which means that Wall Street has placed very little value on the company's future earnings potential.

Although the economy and, more specifically, consumer spending have slowed, Standard Pacific is still expected to earn $2.98 a share in 2002. (In 2001, the average consensus estimate is for $3.57 a share. It's scheduled to report those results Jan. 23.) This means that the company trades at less than 8 times this year's estimates. That's at a sharp discount to its anticipated annual earnings growth rate of 13% for the next five years, assuming the economy stabilizes.

As a bonus, Standard Pacific sports a dividend of 32 cents a share, an annualized yield of about 1.38%.

Bottom line? A number of the big-name, top-tier homebuilders have had their run, but bargains are still sitting on the shelves. Standard Pacific is one of them. Assuming even a moderate rebound in consumer confidence and spending, and that the company can hit its earnings targets, the stock could trade north of $30 within a year.

If value stocks like Standard Pacific interest you, be sure to check out my newsletter,

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In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Curtis welcomes your feedback and invites you to send it to

Glenn Curtis.