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David Einhorn's Largest Holding Is Trading at a Discount

Investment thesis

David Einhorn (Trades, Portfolio), the founder of Greenlight Capital, has a track record of generating alpha returns in all market conditions. For example, the guru, whose hedge fund had $10 billion assets under management at the end of the third quarter, generated an annualized return of 16.5% from 1996 to 2016, despite the dotcom bubble and the financial crisis wiping billions of dollars off the market over this period. According to the latest 13-F filing, Green Brick Partners Inc. (NASDAQ:GRBK) is currently the firm's largest holding.


Following a solid financial performance in the first nine months of the year, shares of the Plano, Texas-based company have appreciated a staggering 58.4%. However, there seems to be more upside to the stock considering the attractive growth potential. The market, however, has yet to react to this expected growth, which has created an investment opportunity for prudent investors.

Company profile and business strategy

Green Brick Partners is a home building and land development company operating in various regions of the United States. As of the end of the third quarter, the company controlled approximately 9,269 homesites in Dallas, Atlanta and Vero Beach, Florida. The Builder Magazine, in its public builder report card for 2019, ranked the company as one of the top homebuilding companies in the country.

Source: Builder Magazine.

The company's portfolio of eight brands serve different markets. These builders have continued to provide value accretion over the past several years.

Builder name

Markets served

Structure

The Providence Group

Atlanta

Green Brick receives lot sale profits and an equity rate of return.

CB Jeni Lifestyle Homes

Dallas

Normandy Homes

Dallas

Centre Living Homes

Dallas

Southgate Homes

Dallas

GHO Homes

Vero Beach

Green Brick owns 80% of the company.

Challenger Homes

Colorado Springs

Green Brick owns 49.9% of the company.

Trophy Signature Homes

Dallas

Green Brick owns 100% of the company.



Source: Company filings.

In addition to its core business operations, the company provides financial services as it is trying to diversify its revenue streams.

Industry analysis

The growth of the housing market is at the center of Green Brick's success. As such, the state of the economy has a huge impact on whether or not consumers' decide to purchase new homes.

Dallas and Atlanta, the two core markets in which Green Brick operates, continue to see stellar job growth. According to data from Metrostudy, both regions are among the top 10 job growth markets in the U.S. for the 12 months ended in August 2019. This is an indication of stellar economic growth and increasing disposable income, which are good signs for the housing market.

Source: Metrostudy data retracted from the company presentation.

Dallas is also the region with the highest housing starts for the 12 months ended Sept. 30, which confirms that growing household income is, in fact, proving to be a tailwind.

Source: Metrostudy.

Green Brick's presence in Dallas and Atlanta will likely provide ample growth opportunities in the future, which is evident from the continued demand for new houses in these regions. The management has done a commendable job in expanding to Colorado Springs as well through its investment in Challenger Homes.

The interest rate environment is also supportive of future growth, which will be discussed further later on in this analysis.

Overall, the industry outlook is positive for the company. With the right strategy, Green Brick will be able to continue its growth momentum.

Financial performance

For the third quarter, the company reported earnings of 31 cents per share, which is the highest-ever recorded by Green Brick for a single quarter. Since 2014, its total revenue has grown at a compounded annual rate of 24.88%, which is a clear indication of the high demand the company is currently witnessing. Favorable industry conditions and strategic investments catalyzed its growth over this period.

The backlog has increased 94% over the last 24 months. Future revenue growth will depend on the company's ability to translate this backlog into revenue.

In August, Green Brick closed a $75 million private placement of senior unsecured notes due in 2026. Notably, the company was able to raise this amount at a lower cost than its peer group, which is an indication of the strength of the company's balance sheet.

Source: Investor presentation.

According to company filings, the interest coverage of Green Brick stood at 8 times the interest incurred in the third quarter, which is another indication it has a strong balance sheet. High coverage enables Green Brick to efficiently honor debt repayments, which, in return, enables the company to secure lending at attractive rates in the future to support growth operations.

The outlook is promising

Many of the subsidiaries and companies Green Brick partners with have announced new building projects, which are expected to drive revenue growth over the next several years.

Company

New project

Sales opening season

The Providence Group

A 122-home community in Alpharetta.

Winter 2019

CB JENI Homes

A 79-townhome community in Irving.

Currently open for sales.

Southgate Homes

A 44-home community in Lucas.

Currently open for sales.



Source: Company filings and announcements.

While these projects will positively impact revenue in 2020, the outlook for major regions in which the company is operating, as discussed earlier, will prove to be a catalyst for growth in the next five years as well. Management plans to establish a presence in locations where housing starts are robust, which would help Green Brick perform better than its small-cap peers. This should help the share price rise to new highs.

A regional analysis and forecast published by John Burns Real Estate Consulting in October categorized the Atlanta Metro Area and Dallas Metro Area into various desirability levels. The most highly desirable areas were given an "A" rating and are marked in dark blue in the graphic below. Green Brick-owned properties are marked by green dots.

Source: John Burns Real Estate Consulting/ company presentation.

As evident from this illustration, the majority of the company-owned land is located in the most desirable areas, which is a welcome sign for investors who are waiting on the sidelines. According to this report, the highest-rated areas are expected to attract the most tenants over the next decade.

The interest rate environment is also supportive of increased activities in the housing market, which would translate into higher revenue and earnings for the company. In its most recent policy meeting concluded on Dec. 11, the Federal Open Market Committee held the upper limit of the target federal funds rate unchanged at 1.75%. Commenting on this move and the future, Fed Chair Jerome Powell noted that rates will likely remain at this level throughout 2020 as well. This decision will cause refinancing activities to rise and consumers to seek new loans to purchase homes.

Overall, given the U.S. does not enter a recession, the outlook for the next five years is positive for the company.

Valuation

A discounted cash flow model was used to determine the intrinsic value per share of Green Brick Partners. The company does not pay any dividends at the moment and is performing much better than its small-cap peer group.

The revenue growth assumptions for the next five years are presented in the table below.

Financial year

Projected revenue

Implied growth rate

2019

$755 million

21.1%

2020

$876 million

16%

2021

$950 million

8.5%

2022

$1.01 billion

6.5%

2023

$1.06 billion

5%



Source: Reuters estimates and author's projections.

Below are the other major assumptions used as inputs for the model.

  • Capital expenditures to average 0.2% of revenue.
  • A tax rate of 21%.
  • Cost of capital of 8%.
  • Terminal growth rate of 2%.



The intrinsic value per share comes to $16.83, which indicates an upside of 45% from the market price of around $11.38 on Friday. Expected revenue and earnings growth over the next five years will act as catalysts for shares to converge with its intrinsic value.

Risks

A significant slowdown in the U.S. economy remains the primary risk for Green Brick's prospects because its expected growth depends on the performance of the housing market. According to the latest available data from the Federal Reserve, however, it's reasonable to believe that a recession is not expected to occur for at least the next couple of years.

Conclusion

Green Brick Partners has an attractive growth profile and is operating in markets that are seeing robust growth in new housing starts. As the company continues to beat analysts' earnings estimates, which it has done for four consecutive quarters, the share price will start to converge with its true value, delivering a stellar return to investors.

Disclsoure: I do not own any stocks mentioned in this article.

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This article first appeared on GuruFocus.