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Standard Pacific Corp. (SPF): Is This Home Building Stock Still a Buy?

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Standard Pacific Corp. (NYSE:SPF) has been involved in home building and home financing since 1965. It has one of the most diversified home building operations across the country. Specializing in constructing and selling attached as well as detached homes for single families, Standard Pacific Corp. (NYSE:SPF) has been demonstrating sustainable superior performance for over five decades.

Standard Pacific Corp. (NYSE:SPF)

The company has almost doubled its market capitalization since June of last year. Standard Pacific Corp. (NYSE:SPF)’s P/E ratio currently stands at 7.55 compared to the home construction sector’s overall P/E ratio of 21.93, making it comparatively undervalued against competing companies.

The home building sector, as a whole, has witnessed considerable growth over the last 12 months. The rise in Standard Pacific Corp. (NYSE:SPF)’s stock price was a direct result of a combination of factors including low inventory of houses on the market, and renewed demand for single family homes which is at its highest in the last six years since the sub-prime crisis. Home prices in 20 major U.S. cities ascended 8.1% year-over-year in early 2013 that contributed to the higher profit margin of Standard Pacific Corp. (NYSE:SPF) and rise in its stock price.

Others in the industry

U.S. equity markets have seen a strong bull run since June 2012. Most of the publicly traded home building companies have also seen sharp rises in their stock prices over the last year, including major players in the sector and competitors of Standard Pacific such as Meritage Homes Corp (NYSE:MTH), D.R. Horton, Inc. (NYSE:DHI), and The Ryland Group, Inc. (NYSE:RYL).

On-site home builder The Ryland Group, Inc. (NYSE:RYL) covers all four segments of the U.S. market. With innovative projects at hand like the Architectural Collection at Carmel, Indiana, its stock price has risen from $19.39 (June 4, 2012) to $49.72 recently. The company saw an increase in revenue of 47% for 2012 and the stock price rallied. For 2013, analysts estimate that revenue will increase as much as 53%. Currently, its P/E ratio stands at 37.73 and the return on equity (ROE) at 13.65. The P/E ratio of Ryland is considerably high compared to the sector’s 21.93, making it appear overvalued.

Being one of the leading home builders in the U.S. and announcing solid second-quarter results for 2013, D.R. Horton, Inc. (NYSE:DHI)’s stock price is trading steady at $27.17 as of May 17, 2013, compared to only $14.48 on June 4, 2012. Its $0.32 per share net earnings beat the Zacks Consensus Estimate by 60% in the second quarter of 2013. With a 33.08 ROE, D.R. Horton’s P/E ratio is currently at 8.87, which puts it in the same bracket with Standard Pacific.

Meritage Homes Corp (NYSE:MTH) is also focused on single family homes. Its operations span across southern and western U.S. including Arizona, Texas, and California. Compared to a $0.15 loss per share in last quarter of 2012, it turned the tables and posted a $0.32 per share profit in first quarter of 2013. Following the industry trend, Meritage Homes’ stock price went from $25.19 on June 13, 2012, to $50.87 as of May 17, 2013. With a current P/E ratio of 15.78, the stock is poised for appreciation.

Sector analysis

Regardless of the growth atmosphere in the equities market, U.S. home builders are anxious about declining sales of single family starts, which were down 2.1% to an annual rate of 610,000. It is still above the key level of 600,000 but concerns regarding growth have been a key issue for investors.

There are some concerns as limited access to bank credit for construction is holding back many new projects. Since the sub-prime crisis, overall rigid requirement principles for mortgage borrowers have made it harder for buyers to secure home loans, and it is putting a dent in the overall demand. On the other hand, the escalating costs of building materials, difficulty in finding develop-able lots in key urban areas, and lack of appropriate skilled labor has been holding back the home building sector in first two quarters of 2013.

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