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Bull of the Day: Forestar Group (FOR)

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Many times management talks a good game by saying that they will reduce debt while increasing revenues, but that rarely happens in the real world.  Yet, once in a great while, it does happen.  The Zacks Bull of the Day, Forestar Group had $293.3 million in net debt at the end of 2015, and was able to end Q3 16 with $9.8 million in net cash.  

This Zacks Rank #1 (Strong Buy) company formerly known as Forestar Real Estate Group Inc. operates in three business segments: real estate, mineral resources, and other. The real estate segment owns directly or through ventures real estate. The mineral resources segment manages acres of oil and gas mineral interests. The other segment primarily sells wood fiber from its land primarily located in Georgia, and leases land for recreational uses.

According to management, “At third quarter-end 2016, we own directly or through ventures interests in 55 residential and mixed-use projects comprised of approximately 7,000 acres of real estate located in 11 states and 15 markets. The company also owns approximately 590,000 net acres of oil and gas fee minerals located in Texas, Louisiana, Georgia and Alabama. The company has water interests in 1.5 million acres which include a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from 1.4 million acres in Texas, Louisiana, Georgia and Alabama, and 20,000 acres of groundwater leases in central Texas. The company's non-core assets include about 75,000 acres of timberland and undeveloped land, and commercial and income producing properties which consist of three multifamily projects and two multifamily sites.”

Recent Earnings Results

Last Wednesday, management posted Q3 16 results where they crushed both the Zacks consensus earnings and revenue estimates.  Specifically, FOR posted a +700% positive earnings surprise, and a +94.7% positive revenue surprise.  The company saw year over year gains in Total revenues +46.7%, Total segment earnings +210.5%, and Cash and cash equivalents +29.3%.  Management also saw General and administrative expenses decline by -46% compared to Q3 2015.  

Management’s Take

According to Phil Weber, CEO, “In one year, we have made significant progress transforming Forestar through the execution of our key initiatives to divest non-core assets, reduce outstanding debt, reduce SG&A costs and focus on maximizing shareholder value. Key highlights include selling $425 million in non-core assets, reducing outstanding debt by over $320 million, and reducing annual interest expense by approximately $23 million going forward. Once non-core asset sales are fully executed, projected annual SG&A costs are expected to decrease by over $50 million compared with 2015 actuals. In addition, we have transformed our capital structure by significantly reducing leverage, which has strengthened our balance sheet and created flexibility.”

Price and Consensus Graph

As you can see below, due to their key initiatives, and focus on maximizing shareholder value, recent estimates have significantly increased. 

FORESTAR GROUP Price and Consensus


Increasing Estimates

Over the past 7 days estimates for Q4 16, FY 16 and FY 17 have all seen significant upgrades; Q4 16 rocketed up from $0.13 to $0.59, FY 16 jumped up from $0.32 to $0.97, and FY 17 increased from $0.29 to $0.35.

Bottom Line

Management was able to cut costs and increase revenues ahead of schedule, and is poised to continue this trend into 2017.  The company strengthened their balance sheet, and saw net debt reduction of more than $300 million over the past 9 months.  Therefore, management has been extremely successful in their key initiatives strategy.  

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