One of the most surprising stories of 2020 is the huge surge in home sales. In typical economic downturns, housing takes a big hit as economic uncertainty and job losses take a bite out of demand for homes. This has been incredible for homebuilders, who've seen their orders surge as the combination of pent-up demand and low interest rates, along with nowhere near enough existing home inventory, has many buyers looking at new homes.
On the Dec. 4 edition of "The Wrap" on Motley Fool Live, host Jason Hall introduced viewers to Green Brick Homes (GRBK 2.08%), a small homebuilder with operations in two high-growth markets and a handful of characteristics that have it high on his watchlist. Check out the video below to learn why Green Brick could prove a huge winner over the next decade, as millions of millennials become homeowners.
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Transcript:
Jason Hall: Green Brick Partners -- the ticker is GRBK. Most of you know I'm a big fan of NVR (NVR -1.01%), Meritage Homes (MTH 2.67%), LGI Homes (LGIH 1.02%). The latter two focus on the entry-level market, and NVR because of its business model and financial strength.
Green Brick's really interesting because it has a little bit of both. I am going to do a screen share here and just share some things about Green Brick over the next minute or so. Let me make sure I got it pulled up here. You guys should be able to see that. Can you see that right here? So this is stock returns year to date. Green Brick Partners is up 97%. Then you've got LGI Homes. Meritage up about 45, 50%. NVR is only up about 5%.
But the big story this year for homebuilders -- normally in recessions, home sales plummet. This is an upside down, everything about 2020. Nothing is happening the way that it normally does in a recession in some pretty broad ways. You think about home sales are up big, whether it's existing homes or new homes. You look at home orders. NVR, last quarter, they had 40% increase in orders. Meritage and LGI reported 70% plus order growth. Green Brick also reported some big order growth.
Now, let me get to the meat and potatoes of why this company is on my radar, and what's interesting about it. First thing, operating cash flow growth has been enormous this year as you would expect. But here's what really caught my eye. This is gross profit margin. You look at profit margin and you go back aways and it's been good, but very high gross profit margins for a homebuilder. Anything 20% and above for a homebuilder is generally consider really good.
Green Brick is consistently getting a pretty strong gross profit, and so if they can continue to do that, that's a very positive thing. But here is, on the balance sheet side, because homebuilders are really leveraged businesses. I'm going to throw some different leverage ratios on here to look at. Green Brick Partners is the purple line (in screen share.) Debt to capital, 25%, it's very low. Debt to EBITDA [earnings before interest, taxes, depreciation, and amortization] of two times. Again, if that's right in line with what you see from Meritage and LGI, which are some of the lower end.
Then you look at debt to assets. It has a lower debt-to-assets ratio even than NVR. This is an industry where you want lower leverage, you want the balance sheets to be a little bit stronger, and they absolutely accomplish that.
Here's the thing that has it really high on my list to buy. From a financial perspective, we've seen they're growing, they're executing well. They have great margins. They have a strong balance sheet, $1.1 billion market cap, a lot of room to grow. They're in Texas. They're around Atlanta. They're in some markets that have really good demographics and they're favored to continue to support. The big thing is, you have this long tail demographic shift of people like Nick's age that are moving into the homebuying market.
I think the next decade, we're going to see the biggest shift into homebuying in history. I think we're going to see a bigger shift than any time in history and it comes on the tail of almost a decade of homebuilders not building entry-level housing. It's like this hurricane of this massive pent-up demand coinciding with zero excess inventory. It's just really big opportunity. I really like Green Brick Partners.
