Is Beazer Homes a Sensible Investment?

With shares of Beazer Homes USA Inc. (NYSE:BZH) trading at around $18.00, is BZH an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Home-BuildersBeazer Homes made progress toward profitability in Q1. The company showed year-over-year improvements in most major financial metrics, including revenue and gross margin. New Home Orders increased 29 percent year-over-year, which was mostly due to better absorption rates and a lower cancellation rate. New Homes Closed increased 20 percent year-over-year. Backlog increased 39 percent in units and 52 percent in value year-over-year. Community Count wasn’t impressive, but this was hinted at last November and relates to Beazer Homes focusing more on existing assets at the time. Looking ahead, Beazer Homes sees increased demand for new homes as well as improved new home pricing.

On the negative side, margins and cash flow are weak, ROE is -70.10 percent, analysts aren’t in love with the stock, and there is a 29.70 percent short position, which indicates high potential for danger.

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Let’s take a look at some important numbers prior to forming an opinion on Beazer Homes.

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Beazer Homes is extremely weak. The balance sheet is in negative territory, but less than $200 million in debt will come due over the next five years.  

Debt-To-Equity

Cash

Long-Term Debt

BZH

6.17

$648.15 Million

$1.50 Billion

KBH

4.57

$567.13 Million

$1.72 Billion

PHM

1.21

$1.48 Billion

$2.65 Billion

 

T = Technicals on the Stock Chart Are Mixed 

Beazer Homes has underperformed KB Home (NYSE:KBH) and PulteGroup (NYSE:PHM) for every timeframe listed below. While the last year has shown a good return, it’s nothing compared to the returns shown by competitors. If you believe in the old Wall Street adage that the winners keep winning, then this isn’t a great sign.

1 Month

Year-To-Date

1 Year

3 Year

BZH

-3.93%

1.93%

21.80%

-11.84%

KBH

10.35%

13.77%

88.83%

17.07%

PHM

7.25%

9.84%

157.40%

75.75%

 

At $18.00, Beazer Homes is currently trading above all its averages. 

50-Day SMA

16.57

100-Day SMA

16.89

200-Day SMA

15.36

 

E = Earnings and Revenue Have Been Inconsistent          

If you’re looking for consistent growth and stable returns, then this isn’t the place to be. Earnings and revenue have shown no consistent pattern on an annual basis.

2008

2009

2010

2011

2012

Revenue ($)in billions

1.74

961.88M

991.15M

742.40M

1.01

Diluted EPS ($)

-123.45

-24.50

-2.85

-13.84

-7.87

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

12/2011

3/2011

6/2012

9/2012

12/2012

Revenue ($)in millions

188.55

191.64

254.56

370.93

246.90

Diluted EPS ($)

0.04

-2.55

-2.00

-3.36

-0.84

 

T = Trends Temporarily Support the Industry

The housing market is improving. That can’t be argued. What can be argued is the sustainability of this improvement. The following point was made on the PulteGroup article. Recently, people have been taking advantage of low mortgage rates and cheap home prices simply because of great deals. Owning is also now more affordable than renting in many cases. However, this has led to an increase in the price of homes. This would usually be a good sign for the industry, but that’s not the case in this economy with a weak consumer. As home prices continue to rise, the improving housing market will lose its momentum. Until that happens, all is well and good, but don’t expect long-lasting improvements throughout the industry.

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

Beazer Homes experienced extraordinary returns from the mid-1990s to the mid-2000s. Those days are over, and they will not be returning at any point in the near future. However, that doesn’t mean that Beazer Homes should be avoided. This is a decent speculative play with respectable potential, but the upside potential and downside risk are about equal, which makes Beazer Homes a WAIT AND SEE.

If you want to invest in this group, then consider looking at PulteGroup. Just keep in mind that this is a highly volatile group at the moment. The returns may be fast and furious, but they have the potential to be erased in short order.  

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