|
|
|
 Business News | May 2008 
S&P on Homex
 TraderMark - iStockAnalyst
go to original
| HOMEX
Sectors: Finance
Symbols: HXM, PGR | | |
This Homex (HXM) article was posted a few weeks ago but just had time to really get around to posting it. Since I don't talk much about this position, it is worth posting - it is a relatively comprehensive overview and with the stock doing very nicely of late, we should discuss from time to time some of the lesser known names in the fund.
While the U.S. housing market continues to suffer, homebuilding has been thriving just south of the border. The Mexican housing sector, representing 3% of that country's gross domestic product (GDP), delivered impressive growth in the past few years, in our view, pushed by the pressing need for affordable homes, economic stability, and strong government support.
We view Mexican homebuilder Desarrolladora Homex (HXM) as a compelling growth company in an emerging market. We think the combination of high market growth potential in the Mexican housing market with its low penetration of home ownership, along with the company's conservative cash management practices, will lead to positive earnings growth and a strong balance sheet.
Another factor in our strong buy recommendation is that Mexico and Homex use conservative lending practices compared to the U.S. market (hmm, conservative ... what a concept)
Mortgage loan issuers (government agencies and private banks) use fixed interest rates, have up-front fees of up to 3%, provide loans with terms of up to 30 years, require down payments of 10% to 20%, and require unemployment insurance. (outrageous terms - I much prefer 0% down, 120% LTV - buy one home, get one home free - type of deals; much more stable and you can bundle these mortgages into beautiful packages called CDOs that very "sophisticated" investors will buy in bunches because... well they have more money than they know what to do with.... plus they're sophisticated... yep)
In addition, Mexico's largest mortgage lender, Infonavit, is offering credits for homes bought with solar water heaters, energy-efficient lightbulbs, and other energy conservation items. (once again, I grit my teeth watching "3rd world countries" so much more progressive than the "sole superpower" - what a sad statement. We must look so backwards to the rest of the world....)
Between 2007 and 2012, the Mexican government expects $250 billion will be invested for the construction of infrastructure, and $200 billion to be approved to cover estimated demand for 650,000 new households per year, resulting in the need to build 4 million new homes. This is in addition to about 2.1 million families that require independent housing today.
Most homes in Mexico cost less than $40,000. In spite of the advances in Mexico's housing sector, the market shows no signs of a bubble, in our view. Housing prices increased about 40% between January, 2000, and May, 2006, compared to a 107% rise in U.S. prices in the same period.
We believe there are additional strengths in the Mexican housing and mortgage market, including fiscal reform that may provide more resources for additional investments; 37% of the population being between 20 and 45 years old; government infrastructure policies ($40 billion average annual investment); government subsidies for housing; and opportunities for growth in vacation and retirement housing.
We do see some factors that could slow Mexican housing and mortgage growth. Mexico is highly dependent on the U.S. economy, and in our view, foreclosure procedures are slow. In addition, there is deficient urban planning, insufficient infrastructure, and slow modernization of public property registries, by our analysis.
As of Dec. 31, 2007, Homex had 62 developments under construction in 21 Mexican states and 33 cities. Homex is one of the leading homebuilders in Mexico's top four markets—Mexico City, Guadalajara, Monterrey, and Tijuana—and continues to have a leading position in the other 29 cities.
Mortgages represent 10.6% of Mexico's GDP compared to about 69% in the U.S., and 58% in Spain, according to BBVA Bancomer, Mexico's largest financial institution.
Revenue growth in peso terms has been strong in recent years, in our view, including an increase of almost 27% in 2007, reflecting a higher proportion of middle-income homes, 17% more homes sold, and higher average selling prices per home.
Homex is developing a position in the tourism market by building communities for the second-home market in key tourist destinations in Mexico. The first stage of development involves launches in Cancún, Los Cabos, and Puerto Vallarta.
We expect stable gross margins between 31% and 33% in 2008 and 2009, and see operating margins in the 20% to 21.5% range, compared to 21.7% in 2007. Our 2008 operating earnings estimate of $3.65 per ADS assumes an exchange rate of 10.47 pesos per $1, the rate as of Apr. 24, 2008. Our 2009 forecast is $4.40 per ADS. |
| |
|
Vallarta Weddings
Tell a Friend
Site Map
Print this Page
Email Us