Gafisa (GFA): The Best Homebuilder In the Universe

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The housing market in Brazil operates in a what which is beyond the wildest dreams of US homebuilders. The sector has very little leverage. A number of government programs help people obtain mortgages. The number of homes being sold is increasing by about two million a year.

Gafisa (GFA), the largest company in the industry, has watched its shares rise 70% this year. The stock trades at $42. Analyst target prices range from $43 to $57. For purposes of contrast, DH Horton (DHI) is off over 45% during the last 52 weeks and Pulte (PHM) is down over 55%.

Gafisa benefits from falling interest rates in a country where they have been high for years. In 2005, the rate set by the central bank for lending was 19%. That has fallen to 11.75%.

The government in Brazil has also set up a system that drives commercial banks to fund mortgages. They must take 65% of the savings in personal accounts and put that out in the form of residential loans.

In the first quarter of 2008, Gafisa’s revenue was up 42% to R$319.5 million. Project launches for the quarter totaled R$577.9 million, an increase of 91%. EBITDA increased 51% to R$50.8 million from R$33.8 million.

In an interview with the company’s CEO Wilson Amaral, he explained why Gafisa has some unusual advantages for building its housing complexes, many that US builders envy. The company does not begin a project until 70% of the residences are under contract. A typical buyer puts down 25% to 30% of the total purchase price in cash.

During the last year, over twenty homebuilders went public in Brazil. Many have floundered because they are too small and some of them trade near liquidation value. That may give Gafisa some bottom-fishing M&A opportunities. The company might raise more equity toward the end of this year to fund expansion, but the opportunity to pick up land and inventory from troubled players may be too great to resist. There is already a lot of US smart money in the company, including Sam Zell.

Gafisa looks like US homebuilders did in the 1950s and 1960s before leverage became the core of most home loans and the bubble began.

Douglas A. McIntyre