Centex is a leading US homebuilder. The company sold over 35,000 homes in 2006 at an average selling price of $307,000, higher than the national median of around $210,000. Offerings range anywhere from under $80,000 to over $1.5 million, and the company operates in 25 states and in all areas of the United States (see chart below). Most homes are single-family detached units, which accounted for approximately 80% of the units sold last year. The company also offers, to a lesser degree, attached, multi-family homes.
The company operates in a highly cyclical industry. New home construction, home prices and new home sales volume are heavily dependent upon job growth, interest rates, and the business cycle at large. Low interest rates and high job growth bode well for homebuilding, but as the recent subprime lending crisis and depressed housing market has illustrated, things can sour quickly and the business can be difficult to predict. Key homebuilding numbers, such as housing starts and existing home sales have continued to come in weak of late. Homebuilding is highly competitive and marked by few barriers to entry, low profit margins, and high financial leverage.
Below is a breakdown of company revenue by region, along with a chart depicting the company's revenue and operating profit. Recently, the company's operating profit has been hit largely by falling home prices. As discussed below, when home prices in the company's geographic operating areas fall, the company must either write down the value of its unsold home inventory or, when it does sell the inventory, take a substantial hit to its margins. This is largely because of the lag time between constructing and then selling a new home -- if the company builds a home at $150,000 and expects to sell it at $200,000 given market prices, any change in the market value of the home erodes the originally anticipated $50,000 profit because the construction expense is largely fixed. Indeed, in fiscal 2006, the company took write-offs and impairments of nearly $650 million related to declining inventory values and canceled options because of market conditions. 
Below is a table of relevant operating metrics for the company. In fiscal 2007, the company's average home price, for the most part, stagnated, while the number of home sold decreased. This had a negative impact on margins and results from operations.
|Inventory year end||$7,563||$9,658||$8,951|
The accepted accounting principles for homebuilders can be a bit convoluted, and it is important that investors understand certain non-intuitive accounting methodologies. Here are a few notable accounting conventions for builders that may not be immediately clear to investors:
The company competes against a highly fragmented base of other homebuilders. These companies may be national or local players and given the highly competitive nature of the industry, competition is stiff and often marked by low margins and low returns on capital. The company also competes for buyers with existing homes that have hit the market, and competes more broadly with other housing alternatives such as apartments, condominiums, and mobile homes.
Below is a table comparing metrics from several competing publicly traded homebuilders. Note that no company has anything close to a dominant national market share, and the industry generally is marked by low operating margins (and high debt to finance construction expenses).
|Company||Revenue (TTM)||Operating Margin||2006 Closings||Debt/Equity||Market Share|
|D.R. Horton (DHI)||$11,300||8%||53410||0.783||4.65%|
|Pulte Homes (PHM)||$10,750||0%||41487||0.771||3.61%|
|KB Home (KBH)||$8,980||3%||32124||0.812||2.80%|
|Beazer Homes USA (BZH)||$4,270||4%||17500||1.194||1.52%|
|Ryland Group (RYL)||$3,530||9%||15392||0.74||1.34%|
|M.D.C. Holdings (MDC)||$3,470||1%||13123||0.576||1.14%|
|Standard Pacific Lp (SPF)||$3,310||7%||10763||1.473||0.94%|
|Toll Brothers (TOL)||$4,650||16%||8601||0.642||0.75%|