GRBK - Green Brick Partners Eyes Consolidation Amid Strong Fundamentals

2023-09-20 08:58:26 ET

Summary

• Green Brick Partners experienced significant growth in net new home orders, surpassing historical records and industry peers.
• The company saw a decline in residential unit revenue from the previous year but maintained stable average sales prices.
• The stock price is pulling back from a major resistance level, and it's expected to dip more before experiencing the next rise.

Green Brick Partners, Inc. ( GRBK ) showcased remarkable financial milestones during the recent quarter, distinguishing itself within the homebuilding industry. The company experienced significant growth in net new home orders, surpassing its historical records and industry peers. While the residential unit revenue was noteworthy, it did see a decline from the record set in the previous year. The average sales price of homes remained consistent, and the backlog witnessed a modest uptick by the end of the period. This article delves into the financial and technical evaluation of GRBK, aiming to discern future stock price trajectories and pinpoint investment avenues. Notably, the stock price appears to be retracing from a significant resistance, potentially stabilizing at subdued levels before its subsequent upward swing.

A Deep Dive into Financial Achievements

In the second quarter of 2023, GRBK's net new home orders witnessed a significant growth of 50.8% year-over-year, marking the largest increase among its industry counterparts and registering the highest for a second quarter in the company's records. Regarding the absorption rate, there was an impressive year-over-year increase of 39.4%, bringing the rate to 9.9. However, when it came to residential unit revenue, the company garnered $454.4 million, which, while being the second-highest in the company's history, was down by 11.3% from the previous year's record level set in Q2 2022. Based on the chart below, GRBK's quarterly revenue has consistently shown an upward trend over the past ten years.

The average sales price of homes delivered during this period remained stable, clocking in at $580K. However, the average sales price for backlog witnessed a slight increase of 1.7% year-over-year, settling at $664K as of the end of June 2023. One of the areas where GRBK experienced an upward shift was in the SG&A (as a percentage of residential units revenue), where it increased by 260 bps year-over-year, coming to 10.8%, a shift primarily attributed to a surge in brokerage commissions. In terms of earnings per share ((EPS)), the diluted EPS for the company was $1.63, the second-highest in its history, but was down 21.6% from Q2 2022's record level. The chart below presents the gross margin for the past three years. After a record high in Q2 2022, the gross margin slid down by 100 bps to 31.33%, which sequentially increased by 370 bps.

On the year-to-date front for 2023, GRBK's net new home orders spiked by 64.8% year-over-year, the topmost increase among its competitors. The absorption rate increased by 53.3% compared to the previous year, reaching 11.5. The revenue from residential units noted a 3.1% year-over-year increase, accumulating to $904.8 million. The average sales price of homes delivered also climbed by 3.1%, quoted at $585K. The SG&A rose by 180 bps year-over-year, tallying up to 10.5%. While notable, the diluted EPS stood at $3.00, a dip of 7.7% from the record level observed in 2022, and the year also witnessed a slight decrease in the homebuilding gross margin by 100 bps, positioning it at 29.5%.

GRBK has been diligently steering its business with clear priorities. The company is actively managing the closings in its current backlog, working collaboratively with buyers across all phases to ensure financing is secured. Consistency has been maintained in buyer credit profiles, and the company takes pride in having the lowest cancellation rate among public homebuilders, with a rate of 7.4% in Q2 2023. Furthermore, GRBK has been astute in managing its sales pace and starts, shown by the incentives on new orders decreasing by 50 bps sequentially in Q2 2023. The company boasted the highest gross margins among peers, providing the required flexibility. In Q2 2023, it increased by 25% sequentially to 833.

GRBK is unwavering in its commitment to bolstering its balance sheet. The goal is to sustain a reduced debt-to-total capital ratio, providing more financial flexibility, especially in volatile economic conditions. The company successfully accumulated $210 million in cash, a strategic move designed to avoid the steep costs of financing in today's high-rate setting. Notably, as of the end of June 2023, the company had no outstanding balances on its revolving lines of credit.

Navigating Technical Chart Patterns

The technical perspective for GRBK reveals a pronounced bullish trend, as illustrated in the monthly chart below. However, the stock price is undergoing a correction upon encountering formidable resistance, evidenced by the ascending broadening wedge pattern. This pattern traces from the 2020 low at $5.66, peaking in 2023 at $59.30. The wedge's presence signals significant market volatility, and the sharp retreat from this resistance suggests potential further downward movement. Yet, given the company's robust fundamentals, this correction may present a viable entry point for long-term investors.

Moreover, the RSI has sustained above the midpoint for an extended period, and its decline from overbought territories hints at more bearish momentum. The primary support for the ascending broadening wedge is between $25 and $30.

For a more in-depth analysis of GRBK's recent performance, the weekly chart displays a bearish "head and shoulders" pattern, confirming the market's downward inclination. The past week's weekly candlestick settled below the red trend line, originating from 2020's highs of $25.05. This breach intensifies the bearish drive. Interestingly, as the price surpassed the trendline, the RSI dipped below 50, emphasizing the enduring bearish momentum. The monthly chart's robust support, positioned around $30, is also observed in the weekly chart and delineated by a blue line. In 2023, this blue line was the pivot for an inverse head and shoulders pattern, catalyzing a significant uptrend.

Diving deeper into GRBK's price dynamics, the short-term daily chart underscores a bearish "head and shoulders" pattern that led to substantial market dips in August and September 2023. This short-term chart indicates the daily inside bars, suggesting a continuation of price consolidation at crucial support levels and a likely perpetuation of the downward trend.

Market Risk

GRBK has demonstrated commendable financial prudence, strengthening its balance sheet and judiciously managing its capital. However, the company is not entirely insulated from broader market risks. One primary concern is the broader economic uncertainties, which can be exacerbated in high-interest rate environments. These uncertainties can potentially influence GRBK's operations, particularly given its focus on managing the closings in its current backlog. This emphasis makes the company vulnerable to risks like delays, buyer cancellations at rates higher than recent lows, and unexpected costs. In addition, while GRBK has shown discretion in its land and lot strategies, the rapidly changing dynamics of the real estate market, potential regulatory challenges, and growing environmental concerns can pose significant challenges to the company's growth trajectory.

Moreover, GRBK's revenue strategies hinge heavily on the persistent strong demand in the housing market. Their approach to selectively raise prices and meter sales could falter if there's a noticeable shift in housing demand. Technically speaking, GRBK's stock price exhibits signs of increased volatility, with the presence of patterns like the ascending broadening wedge and the bearish "head and shoulders" on weekly and short-term charts. These patterns suggest elevated price swings and potential downward pressure on the stock. Such heightened volatility might lead to erratic stock price behaviors.

Bottom Line

GRBK has set itself apart in the recent quarter with impressive financial landmarks and strategic operational maneuvers. The company has outperformed within the homebuilding industry regarding new home orders and has showcased resilience by prudently managing its backlog and reinforcing its balance sheet. These financial achievements reflect GRBK's forward-thinking approach and adaptability in an ever-evolving market.

However, no company operates in isolation, and broader market risks, especially economic uncertainties and volatile interest rate environments, pose challenges. GRBK's strategies, though commendable, are still susceptible to shifts in housing demand, regulatory hurdles, and the volatile real estate landscape. While there are certainly opportunities to be harnessed, both from a business and an investment perspective, stakeholders should tread with an informed and well-considered approach, bearing in mind the multifaceted nature of the market.

From the technical perspective, despite the bullish trajectory for GRBK, there are evident signs of market corrections and potential bearish inclinations. When viewed in tandem with the company's fundamental strengths, such technical patterns suggest a mixed outlook that underscores the importance of cautious optimism. In the short term, there's a noticeable bearish pressure. However, any dip back to the $25 to $30 range is an attractive buying opportunity for long-term investors.

For further details see: