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U.S. Housing Market and Ferrellgas Bail Out Themselves

Adam B. Scott

NEW YORK (TheStreet) -- The 10-year Treasury seems to have stabilized around a 2.50% yield after having quickly retreated from the 3.00% level it kissed intraday on Sept. 5. The first time we saw 2.50% on this all-important benchmark was in August 2011, courtesy of the flight to safety during our second-most-recent debt-ceiling quandary. At that time, the Dow Jones Industrial Average was trading at 11,000 and the U.S. housing recovery was being graded in terms of how far underwater most homeowners still were.

Today home prices have rebounded in most major cities, with such places as Boston, Los Angeles, San Francisco and Seattle leading the charge. According to the S&P/Case-Shiller 20-City Composite Index, we lost 35% from peak to bottom nationwide (summer 2006 to spring 2012); since then we have bounced back by more than 20% from the lowest point. But we still have a long way to go. An additional 28% from here is needed to match the prices from seven-and-a-half years ago.

OK, but this all sounds like bad news, doesn't it? Not entirely.

Higher asset prices mean lower LTVs (loan to value numbers). In other words, a greater number (and value) of outstanding loans -- residential and commercial -- ought to qualify for refinancing. Just because rates are a little higher than they were six months ago doesn't mean the bulk of the housing move is necessarily behind us.

When rates spiked in June, we started hearing that homes had quickly become unaffordable. Based on the simple metrics of prices and loan rates, that was true. However, there are other important factors to consider, like the increased amount of equity that families may be able to use to buy a new house. Two short years ago, that equity might not have been there.

For the family that owed $200,000 on a house worth $200,000 in 2011, it didn't much matter how "affordable" houses were. Now that their home is worth $275,000, the picture has become markedly brighter. This phenomenon is known as the "wealth effect," and it is legitimate.

What's Good for the Goose ...

The same logic can be applied to corporations. As stock prices have appreciated since 2009, companies are able to take advantage in unseen and underappreciated ways.

Take a company like Ferrellgas Partners

However, one thing Ferrellgas has done well is manage its cash flow, the very thing that has enabled it to gobble up smaller competitors. Each acquisition has broadened its customer base and, while not immediately cash-flow positive, has improved gross revenue.

Since 1995, FGP has paid a 50-cent quarterly distribution without missing a beat. Because of the consistency of its cash flows, Ferrellgas' stock has normalized since last year. At its current share price of $23 a share, shareholders are rewarded with an annualized yield of 8.80%. Today, thanks in part to the stock's rise, Ferrellgas has lower debt-to-equity ratio and is paying a smaller amount of interest on that debt.

All this puts Ferrellgas in a better position to take advantage of our still low interest rates. Just last week it offered $325 million in senior notes at 6.25%, using the proceeds to retire a $300 million note at 9.125% four years early. That $10 million in savings every year, and more important, management's ability and wherewithal to make such timely decisions, has been good for the stock. I have continued faith in this management. Look for similar patterns among other companies that may, at first glance, look to be overburdened with what has become the "other four-letter word."

-- Written by Adam B. Scott, founder of Argyle Capital Partners, in Los Angeles.

At the time of publication, the author was long FGP.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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