Tarragon's Spicy Forecast

By W.D. Crotty
January 5, 2005

According to spice purveyor McCormick (NYSE: MKC), tarragon got its name from a French word meaning “little dragon.” But on Wall Street, Tarragon (Nasdaq: TARR) is a real estate owner, developer, and builder of homes.

And this latter Tarragon is producing spicy results today. In jumping more than 20%, its stock blew by its all-time high of $18.40, rocketing up to $23.80 a share!

Igniting this stock is its earnings guidance for the remainder of its 2004 fiscal year and its fiscal 2005. The company reaffirmed that it could earn up to $2.60 per share this year and added that it could bring in $4.10 next year; for comparison, 2003’s per-share earnings were $1.80. At its current price, the stock trades around 5.8 times the top end of 2005’s earnings guidance.

Those forward earnings look like a steal compared with the 14 times forward earnings competitor Camden Properties (NYSE: CPT) commands. They even look cheap relative to the seven times homebuilders such as Lennar (NYSE: LEN) and Pulte (NYSE: PHM) are going for.

Those looking for more good news will note the company focuses on high-density, urban locations — a current rage. For the latest quarter, homebuilding was 70% of sales. Rounding out the company operations are 14,000 apartments and 1.4 million square feet of commercial space.

As you might guess, there is a catch to all this good news. At the end of 2003, the company had $71.2 million in net operating loss carryforwards to offset taxable income. So, comparing the company to its tax-paying competitors is an apples-to-oranges comparison that unduly favors Tarragon, at least until those NOLs run out.

What Tarragon has going in its favor is that no Wall Street analyst follows the company (heck, this is the first coverage by The Motley Fool, too!), institutional ownership is a slight 9%, and this small cap (equity value is around $340 million) is growing rapidly.

What’s holding the stock back is its exposure to the cyclical nature of the housing market, along with rising interest rates — both significant risks, to be sure. And at today’s new all-time high, I’d say the risk-reward trade-off is canted toward the risk side.