STOCK WATCH


Building Materials Holding: Price Is Right?

This company's shares might be a steal if the slowdown in housing construction is modest and short.



Housing stocks have been hammered in recent months. But the selling may be overdone, says Osman Arain, an analyst with Clear Asset Management, an independent research firm. Arain recommends buying shares of beaten-down Building Materials Holding Corp. (symbol BMHC).

The stock has lost one-third of its value since hitting a high of $99 last fall. "Given the low valuation at which many housing-related stocks trade, a lot of bad news is already likely priced in the stocks," says Arain.

Building Materials, which is based in San Francisco but operates throughout the United States, has two segments. BMC Construction provides construction services -- such as concrete work and plumbing -- for homebuilders. It also sells construction materials. BMC West manufactures and distributes building-related materials such as lumber, wall panels and floor and roof trusses to homebuilders and contractors.

Like other housing-related stocks, shares of Building Materials look remarkably cheap. They sell at 7.5 times last year's earnings and a bit more than 7 times the $9.59 per share that analysts, on average, expect the company to earn in 2006.

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But Building Materials isn't a mere value play. "Although we consider Building Materials a value stock, it has been growing rapidly," Arain says in a note to clients. Revenues jumped 39% in 2005. Return on equity, a measure of profitability, was also extremely high, at 32%. Over the next five years, analysts expect earnings growth of 15% annually, according to Thomson First Call. The stock, which has a market value of less than $1 billion, trades at 0.3 times sales and at two times book value.

There are risks here, though. The firm's debt-to-equity ratio is 61%, "significantly less" than most of its peers, says Arain. Still, in past housing downturns, some companies have drowned in their debt. Most important: How deep will the slowdown in new home construction be, and how long will it last? If the decline is modest and short, this stock is likely a steal. But if the housing bears are right, and the market craters, this stock will fall with the rest of the housing industry. With this stock, Arain argues, you're paying a low price to bet against the housing bears.

--Steve Goldberg




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