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Investment Thesis
Purchasing shares of Green Brick Partners, Inc. (NYSE:GRBK) below its liquidation value of $18.5 per share is a bargain; this share price was last seen in June 2022. We believe this could happen again in 2023 for the final time due to the labor shortage and interest rate headwind. With the high-interest rates expected to seize in the next year and the easing of inflation due to the reopening of China, we expect the housing market to regain its popularity; our target price is $25.8 per share, and we believe buying GRBK at a price below the liquidation value would ultimately be a profitable trade.
Company Overview
There are many pieces of evidence to show that Green Brick Partners is a rising star in the U.S. homebuilding industry. Green Brick Partners focuses on diversified homebuilding and land development, operating through multiple owned subsidiary homebuilders throughout the United States. Green Brick has an immense presence in Texas (CB JENI Homes, Normandy Homes, Southgate Homes, Trophy Signature Homes, and a 90% interest in Centre Living Homes). Their Texas presence is most vibrant in the Dallas-Fort Worth area, where they are the third largest homebuilder in the region. In addition, they have engraved themselves in other large markets such as Georgia (The Providence Group), Florida (80% interest in GHO Homes), and Colorado (noncontrolling interest in Challenger Homes), where they engage in the development of master-planned communities and residential neighborhoods.
As per their 2017 Q4 investor call presentation, Green Brick believes the demand for new homes in the markets they specialize in is there, and they want to focus on “building new homes that buyers want in locations they can afford.” They do this by tuning in heavily on all aspects of the homebuilding process: marketing, land acquisition, land development, entitlements, design and construction, and sales for their mass projects. Their focus on building high-quality homes for the increasingly demanding market continues to be of utmost importance even today. Returning to their oldest 2017 Q4 investor call presentation in 2018, Green Brick managed five brands at 50% and one at 100% ownership. Fast-forward to today, Green Brick manages four brands at 100% controlling interest and another four at a lower, yet still high, controlling interest. In addition, they had a total of 6,219 lots owned and controlled in 2017. Their most recent 10Q report states that they hold 25,890 lots owned and controlled, a tenacious growth since 2017. However, this number has decreased by 2731 since 2021, showing that they are taking precautions in the face of market headwinds.
As seen in the data from Seeking Alpha, GRBK has a higher gross profit margin than its main competing peers 16.85%. Green Brick “was established in 2008 and went public” in 2014 as a result of co-founder David Einhorn of Greenlight Capital arranging a reverse capitalization transaction into BioFuel Energy, a failed ethanol company. Greenlight still controls 37% ownership after a sold transaction in January 2021, where they disposed of 6.7 million shares at $20.55. Greenlight originally purchased the shares at around $6 and sold about 25% of its holdings in GRBK at $20.55 to recapture its initial investment. The current CEO of Green Brick Partners, Inc. is co-founder, Jim Brickman.
Catalysts
Numerous catalysts are in place to create a more robust homebuilding industry. In the latest Earnings Call, management stated that they “believe construction costs have peaked” and plan to reduce their spending based on the leverage they receive from their large-scale dominance in markets with large slowdowns, such as Dallas-Fort Worth. The cost per home constructed is expected to decrease from the current level of $400,000.
The main underlying cause of the increased prices is the lack of labor and skilled labor. As a result of the COVID-19 pandemic, contractors and other professionals working in the construction industry have left the industry. This has led to companies such as Green Brick having to compete to find skilled laborers in the limited batch with the pressure of wages for those still working. With the end of COVID in sight, the labor shortage is expected to cease.
As of the date this article is published, interest rates in the U.S. range from 4.25%-4.50%. Green Brick is currently in the midst of the headwind of increasing interest rates due to increasing inflation; however, it is anticipated that these rates will start subsiding by mid-2023 as factors such as the increasingly opening Chinese economy will ease the inflation. This will also help make it cheaper and easier to import materials required in the construction of future projects; nevertheless, Green Brick will be able to support immediate projects with their current inventory.
Financials
Green Brick has shown immense growth as a company since its establishment in 2008. Seeking Alpha shows that Green Bricks’ revenue has matured from $458 Million in 2017 to $1.8 Billion in 2022 (thus far). The number of new homes delivered decreased by 11.9%, going from 738 in 2021 to 650 in 2022. However, because the average price of these homes increased by 32.6% or $149,200, the revenue generated was higher in 2022 compared to 2021, even with the decrease in homes delivered. In 2021, the company had an average sales price of $458,100; in 2022, this number increased to $607,300, a substantial rise to say the least. This summarizes the increase in revenue over the last year.
Management expects the sale price per home to remain at the current level while the number of homes sold is expected to decrease by 50%, as evidenced by the company’s similar decrease in backlog orders. In the last year, Green Brick sold roughly 2,600 homes. In the worst-case scenario, if they sell 50% of what they did this year, they would sell 1,300 homes. With this number, considering a home sells for the average price of $600000, we can expect roughly $780 Million in revenue. If we multiply this by the net income margin of 16.85%, we get a total earning of $131.43 Million.
Green Brick currently holds $1.5 Billion worth of inventory that can be liquidated within the next year through sales. The average cost to build a home for Green Brick is roughly $400000. If we divide the $1.5 Billion by $400000, we get 3750 homes that can be sold. Based on the company’s current performance of 650 homes per quarter, we can divide the 3750 by 650 to determine how long Green Brick will take to liquidate their inventory. If we do the calculation, we arrive at about six quarters, so about a year and a half. According to their latest 10Q report, they foresee that most of their inventory will be utilized through sales they plan on making in 2023, which supports our calculations.
A majority of Green Brick’s inventory consists of land and houses developed which are ready to sell and currently undergoing houses and land that will be completed within the next year to reach the market. In their latest earnings call, Green Brick said they “have no need to buy land to grow our business and don’t plan to buy much or any land in Q4 2022 or well into 2023” as their inventory is substantial enough at the moment.
Valuation
1) Liquation Value (Expected Bottom Price of $18.5)
If the cash and cash equivalents, receivables, and inventory are added up from the latest 10Q report, we are able to determine Green Bricks’ current total assets: $1.5 Billion. The total liability of the company is $601 Million. In addition, Green Brick has a noncontrolling interest of $21.6 Million and $47.7 million in preferred stock. By subtracting the total liabilities, noncontrolling interest, and preferred stock from the total current assets, we get a liquidation value of $856 Million. By dividing this by the 46.4 Million diluted shares, we compute a liquidation value of $18.5 on a per-share basis. This value would be a very attractive entry price, evident by the price action this year, as every time GRBK’s price reached a low of $18.5 or lower, its price immediately appreciated afterward.
2) Target Price Based On P/E Ratio ($25.8 Per “hare Value)
According to the Y chart, the 5-year median P/E ratio of GRBK is 9.108. With the worst-case scenario of expected earnings of $131.43 Million in 2023, our future market cap computes to be $1.197 Billion. We can then divide this by the diluted shares to find the target price per share value of $25.8. Keeping in mind that the expected earnings are what they would earn in the worst-case scenario, we can say that the worst target price per share would be $25.8. The consensus price target from Wall St. analysts is $24.17, which is quite similar compared to our computed price.
Risk
GRBK is exposed to a few risks. The ongoing COVID-19 pandemic has “negatively impacted the global economy and disrupted global supply chains” for Green Brick and its business operations. They highlight this risk in their 2021 10K Annual Report and state that they believe the pandemic can continue to have immense risks on their operations, financial conditions, and cash flow. They also mention that they “cannot predict how future trends of COVID-19 transmissions will play out,” and as a result, can’t calculate the risk the pandemic really has on their projects. In addition, with the uncertainty of China’s economy reopening, a key piece in the supply chain of resources required for construction, we can’t make a judgment of whether or not materials will be able to be acquired efficiently. According to CNBC, China’s economy will see an increase in reopening, but with the surge of new cases and the upcoming Lunar New Year festival in late January 2023, it is uncertain whether or not China will be able to, in a short enough period of time, make an immediate impact on Green Brick.
In addition, Green Brick has made it clear on their 2021 10K Annual Report that they face the risk of a “failure to recruit, retain and develop highly skilled, competent employees.” Although they have 540 employees and 500 involved in homebuilding operations, they do face the possibility of their employees ceasing employment or having people on the management team leave for any given reason. One of these reasons is a better opportunity at a competitor. Green Brick does their best to discourage this by offering a wide range of company-paid benefits and compensation packages and benefits. For example, medical, dental, life insurance, and other health and welfare plans. Green Brick relies heavily on their key employees. They believe that a “loss of services from key management team members or a limitation in their availability could materially and adversely impact our business, liquidity, financial condition and results of operations.” They believe that their success depends on these people, and the risk of losing them would be a major loss to the company – as mentioned, they do their best to eliminate this risk.
Conclusion
In the past 100 years, it has been proven that purchasing a consistently profitable company’s stock below its liquidation value in the midst of an industry slowdown is a foolproof way to make money in the stock market. Legendary investors such as Warren Buffett, Benjamin Graham, and Joel Greenblatt have done this in the past. Although Green Brick Partners, Inc. has seen a decrease in sales over the past year, plummeting to 650 annual home sales, they are optimistic that with $1.5 Billion in inventory and with interest rates peaking in the first half of 2023, they will be able to sell more of their properties to the growing-in-demand housing market.
Purchasing GRBK at a price of or lower than $18.5 would be a wise choice, but as for now, we will be holding off until it reaches that level. With the expected increase in interest rates and some luck, we might be able to purchase GRBK at the bargain price of $18.5, which was last seen in June 2022. Our target price for Green Brick Partners, Inc. is $25.8, meaning the current price just scratches the surface of exceeding it.