DON HODGES
CO-MANAGER
HODGES CAPITAL MANAGEMENT

COMPANY: Centex
TICKER: CTX (NYSE)
PRICE: $61.84 (as of 4 p.m. yesterday)
52-WEEK RANGE: $55.25-$79.66
MARKET CAPITALIZATION: $7.59 billion

Don Hodges is the co-manager of Hodges Capital Management, the investment adviser of the Hodges Fund (HDPMX) with assets under management of more than $260 million. Centex is a homebuilding company based in Texas. Mr. Hodges spoke to David Dalley of The New York Sun about the company.

What does Centex do?

They’re a homebuilder. They build around 32,000 homes a year in metropolitan areas like Dallas, Houston, Atlanta, and Las Vegas. They typically operate in cities that have growing populations. They also have a division that does residential towers and commercial construction, but their main work is in homebuilding.

Why do you like it?

It’s a stock that’s out of favor at the moment and there’s a lot of negativity right now surrounding the industry. I’m going against the grain here. I like it because it’s a well-run company with a very bright earnings picture. They’ll probably earn at least $10.50 a share this year and they might even earn as much as $11.25. Now, the stock is trading at about $62 – that’s a nominal price multiple of about six times earnings and maybe even lower. That’s very good value.

Why is it so low?

Homebuilding stocks are out of favor right now. It’s due to a fear that the business has been so good and that it’s peaked out. There are definitely a lot of areas in the country where the price of housing has probably reached unsustainable levels and might level out a bit. But Centex builds in states with some of the largest population growth numbers. They might experience a slight slowdown, but the market has it all out of kilter.

Here’s a company that will earn a minimum of $10.50 and is trading at $62. Suppose earnings fell off to $8, or even $7. It’s still a bargain, and it’s still trading on a lower multiple than comparable stocks.

I’m looking at this stock as a 12- to 18-month play in terms of good capital gains, but that’s not long to wait given the limited downside risk.You’ve got a lot of stocks in the marketplace trading at 30 or 40 times earnings. Here’s one at six times earnings.

I just think people have become overly pessimistic about what’s going on in the homebuilding business, but that can change on a dime.

What do you think the stock’s worth?

In 12 months, I would think that it could trade at around $80, without a lot of downside risk.

What are the risks?

The biggest risk would be if unemployment starts increasing. The company says that the most important factor in their business is the number of people who have jobs.

Unemployment would hurt, but the unemployment rate right now seems good and seems to be improving every quarter.

I think anyone buying this stock will make money, and I think the risk is minimal at this price.