While ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself. With that in mind, this article will take a brief look at the best companies of the construction industry, selecting the most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.
Out of the more than 560 companies reviewed by ModernGraham, 17 were identified as being closely related to the construction industry. Of those, two are suitable for the Defensive Investor, six are suitable for the Enterprising Investor, and the remaining nine are considered speculative at this time. Excluding any extreme outliers, the average company was rated as being priced at 89.86% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 23.3. The industry as a whole, therefore would appear to be fairly valued, particularly in comparison to the market (see Mr. Market's Mental State).
The Elite
The following companies have been rated as undervalued and suitable for either the Defensive Investor or the Enterprising Investor:
D.R. Horton, Inc. (DHI)
D.R. Horton is not suitable for Defensive Investors but it does pass the initial requirements of the Enterprising Investor. The Defensive Investor is concerned with the insufficient earnings growth or stability over the last 10 years, while the Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.
When it comes to that valuation, it is critical to consider the company's earnings history. In this case, it has grown its EPSmg (normalized earnings) from a loss of $1.33 in 2011 to an estimated gain of $1.65 for 2015. This is a fairly strong level of demonstrated growth and outpaces the market's implied estimate for annual earnings growth of only 4.08% over the next 7-10 years.
In recent years, the company's actual growth in EPSmg has averaged considerably more than the market's estimate annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that D.R.Horton is significantly undervalued at the present time, a result which is in line with some of its peers. (See the full valuation)
Lennar Corporation (LEN)
Lennar Corporation qualifies for the Enterprising Investor but is not suitable for the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company.
