Is the market suddenly waking up to the value of homebuilders? The entire sector got a boost Friday, as Gen. William Lyon announced an offer to buy all the shares of his company, William Lyon Homes ( WLS), for $93 each, a 23% premium to where the shares closed Thursday. It's a clear sign that the general, who is chairman and chief executive of the company, thought the shares were undervalued. Lyon made a similar move last April, when he announced an offer to buy the company at $82 a share, a 12% premium at the time. The board ended up rejecting the bid after its investment bankers determined it was inadequate. The company's shares ended up hitting a high of over $165 last year, only to sink in the fall when the company reported somewhat disappointing order numbers. Investors became concerned with the overheated housing markets of California, Arizona and Nevada, where William Lyon builds homes, and shares hit a 52-week low of $70.75 just last week. After last year's offer was rejected as too low, investors seem to believe another higher bid will come through. William Lyon shares surged 32% to $100 after the deal was announced. "People must be making a bet that he will come back with a higher offer," says JMP Securities analyst Alex Barron, who had a price target of $100 on the stock (assuming a 7 times P/E off the average of his 2006 and 2007 EPS estimates of $14 and $15, respectively). Along with his trusts, the general controls 74.5% of William Lyon's outstanding stock, so any sale of the company requires his approval. Based off the $100 stock price, William Lyon shares are starting to look more fully valued. When looking at buyout deals, if often helps to look at the company's enterprise value/EBITDA ratio.
William Lyon has said it expects 2006 EPS of $14 to $15, about a 33% drop from 2005. The company projects $1.65 billion in revenue in 2006, with a 22% gross margin. Assuming SG&A expenses as a percentage of sales remain in line with past years, the company will post earnings before interest, taxes, depreciation and amortization of about $258 million to $288 million. At $100 a share, that translates to an enterprise value/EBITDA ratio of 6.1 to 6.8. At the low end, the company is in line with the average homebuilder. At the high end, the stock looks rich based on relative valuation. By comparison, it helps to look at Meritage Homes ( MTH), which focuses on the same markets of California, Nevada and Arizona that William Lyon does. Meritage's earnings aren't expected to drop over the next two years, so the company's trailing EBITDA can be used as a conservative metric. Even though Meritage's stock was up 4% to trade around $59.20 early Friday, that translates into an enterprise value of $2.25 billion. Based off last year's EBITDA of $447.7 million, it suggests an EV/EBITDA ratio of about 5, which is one of the lowest ratios among homebuilders.