Description
A complete, fully-formatted copy of the write-up is available here:
In an effort to get you to view the pdf, I am only posting a brief summary of the idea here. The text doesn’t make a lot of sense without the charts and Appendices, so please check pdf out.
UCP is a homebuilder and land developer with holdings concentrated in Northern California and some in the Puget Sound area of Washington. The company was capitalized in 2008 when it was purchased by a California holding company called PICO holdings. In mid-July 2013, UCP sold shares in an IPO with PICO maintaining a 51% ownership stake. Shares came out at $15.00 and now the stock is trading at $13.52.
The UCP investment thesis is simple. The current and future value of UCP’s assets is significantly greater than its current enterprise value. I will show this through various analyses of UCP’s portfolio of lots and homes. The conclusion that I reach is that UCP’s current value is 50% greater than its current market price and there is an opportunity to make 100% over the next 2-3 years. Further, at the current market valuation relative to the intrinsic value of its holdings, I see very little risk of capital loss, making UCP an extremely attractive investment from a risk/return standpoint.
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
At current prices, I believe that UCP presents an extremely compelling risk/reward proposition. There is the opportunity to buy actively selling communities and, effectively, receive over 3,000 lots in Northern California for free. Because UCP is neither a pure-play homebuilder nor a specialized developer, and owing to its small size relative to estimated peers, the company’s IPO was not very well received. There is very limited analyst coverage, and even the analysts that do follow it value it on traditional cash flow and earnings metrics, rather than a sum of the parts analysis (though I do think Zelman is likely to initiate in the near future, as they were part of the IPO book, and their research is actually quite good).
Even using very conservative assumptions for the future of the housing/land market, I see 50%+ near-term upside in the stock and 100% upside in the next 2-3 years with very little risk of permanent loss of capital.
I recognize that most analysts and investors prefer to value homebuilding companies based on earnings power and book multiples, but I prefer to measure the value of the company’s assets and potential assets to its current enterprise value. UCP’s hybrid model makes this even more important since there can be the assumption that management will at least avoid value-destroying decisions. They don’t necessarily need to maximize value in order for these assumptions to hold, they just need to not sell land that is more valuable to hold or build upon- and vice versa.