Beazer Homes: Buy the Biggest Dog and Teach It to Run

Sometimes it's best not to buy the top-quality companies. This is one of those times when the worst stock can outpace its peers. It's hard for me to give up on buying companies with the best fundamentals. That's my training. But that's not where the action is. This is a market that loves "junk".

Look at retail. Take the Buckle (BKE) and Chico's (CHS). Back in February, you would have read that BKE had 14% same store sales while CHS's were -13%. So, if you'd bought BKE rather than "dud" CHS, would you have been pleased with the result? No way, CHS tripled in value while BKE underperformed gaining 22%.

The best sector right now to look for the worst of the worst is housing. It's been killed, blistered, kicked for over two years now. The market believes that housing has bottomed. (Please no discussion about it not being the bottom -- the market believes it and, therefore, so must you.) So which has the most miserable chart, the company that should have died? Why, Beazer Homes (BZH).

And, if you still aren't convinced, about how awful the stock has been.

Beazer (AKA the dog) has been taken down from $80 to 24 cents. Understandably. They've had SEC, federal, state investigations, financial improprieties, scandal, mold, housing bust, credit problems. Everyone hates them. Gee, I hated the company too. The analysts hate the stock; they've got a sell on the thing. 24% short interest. I wouldn't be surprised if their CEO had a short on BZH. I thought they were going bankrupt. No company could withstand the onslaught.

But BZH survived. The Beazer managed to resolve the SEC, fed/state investigations, financial improprieties, scandal, mold, and credit problems. It's still alive. In fact, it's more than alive.

Its shareholders this past month are happier.

BZH reported on Friday an 81 cent beat. The quarter was still pretty miserable at -72 cents (Remember the exercise: find the dog and teach it to run). Management smartly bought back $115 million for $58 million. I don't think they're done buying back debt at huge discounts. They have $480 million in cash. During their conference call, management intimated they would continue buying debt on the cheap. They've hired Moelis & Company and Citigroup, and "expect to take steps in the future ... namely to protect our liquidity, increase our net worth, and reduce total indebtedness." (Read: Great time to buy their "junk" bonds.)

How's next quarter look? Well, a comparison should be easy. After all, in Q4 of last year, they lost almost a half a billion dollars. (How can a company with revenue of only 700 million lose that much?) In other words, the company performed so badly in the past they can only do better. The company now trades at under $4 compared to $80 two years ago.

Well, that's the Beazer. A true dog. A clunker. You've got to suspend your disbelief. This one's going to run. I think it is has the potential to double or triple.

P.S. The time is come to sell Thompson Creek (TC) which has had a remarkable climb from $3 to $14.

Disclosure: Long BZH

Comments

[Ricard:]

Interesting. It's actually been raising cash...I'd hate to say it, but it looks like this company is doing all the right things...lol.

Aug 11 10:28 PM

[mngordo:]

I bought it when it was higher and then doubled down in the ones and again in the twos to get my average to be 4.10........So I am just about break even. Of course with Pulte Homes having good news today, Beazer should get into the 4's and stay there, at last. Good luck if you're in this.

Aug 12 09:37 AM

[FLbuilder:]

I will try not to be mean in this post but it is hard with the uniformed being so prevalent these days -

First off for all you lemmings ready to send this stock to $5 a share...lets examine a few things.

Earnings (loss) of .72 Cents a share vs. estimated loss of $1.7 per share. Congrats - you did exactly what Beazer managment wanted you to do if you got excited about the "supposed" earnings beat. What am I talking about you ask? Well Beazer had a 1 time gain of $55 Million related to buying back there debt at a discount. This means two things. First, if you take that out, Beazer would have lost close to $2.16 per share this quarter...OUCH. Second, that means debt holders, who are smarter than you or me, would rather get paid back at 50 cents on the dollar today than 0 cents when Beazer most likely goes bankrupty. Buying back your debt cheaply is not a good sign. It does make for nice one time gains however.

Cash - Beazer had $559M of cash at the end of last quarter and now they have $464M. This means they burned $95M worth of cash. $58M of that was for buying back debt - so I can live with that. However the remaining $37M of cash burn was from operations which I cant live with. The other builders are generating cash from operations. That Beazer is not generating cash is a terrible sign. Now I know you make the argument that Beazer should use there cash to buy back more debt. Wrong. The company is burning cash. They cant afford to use any more cash to buy back debt.

Interest on Debt - Beazer is incurring $35M in Interest payments on there debt each quarter. Think about that. They did $225M in revenue so there interest payments equal 16% of revenue. Again...this is really really bad. What hurts them even worse is this. In homebuilding, if you are not developing land, you cant capitalize (include as inventory) your interest payments. You have to expense them. So Beazer had to expense almost $25M in Interest instead of moving it into land inventory. This will continue to happen as they dont need to develop any land and have to much to begin with...as my next point shows...

Land/Inventory - Beazer has $1.4 Billion in inventory. Of that inventory, they classify $415M as "Held for Future Development" and $60M as "Held for Sale". Coming from the industry, I can tell you that what this essentially means is that Beazer has about $475M, or 1/3 of there total inventory, that is worthless to them today. They cant build a home on that land and make money so they have to essentially tell the world it is worhthless. If Beazer could sell all the land they have as held for sale for $60M I would eat crow for sure. They cant. They are probably being offered $15M for what they value at $60M. This is again terrible news.

Equity - Beazers equity declined from $189M to $159M at the end of this quarter from the last one. If you take out the 1 time gain on Debt sale of $50M...they are close to $100M in equity. They will continue to lose money for the foreseeable future. They know that and would tell you if you asked on the conference call. The reality is that they will eventually have 0 or negative equity. Unless they offer a ton of common stock which would dillute the hell out of all existing stock holders anyways.

Conclusion - while earnings reports can be worded to show a positive picture, Beazer is on the precipe of going bankrupt. There only hope is a significant dillution to raise enough money not to go under. Either way, the common stock is worthless so consider yourself warned.

Aug 12 11:03 AM

[Stephen Ros...:]

FLbuilder: You miss the point. The market right now loves this dog, fleas and all (I'm all all itchy thinking about them), and, sure, it's the worst of the worst, right. That's the point. But, it's not going bankrupt (you're wrong there). You can hop on the dog, along with the other fleas, and ride this up. Will they need to do a secondary when the stock reaches 11? Maybe, probably. And they'll buy back more debt on the cheap when they price the secondary at 10.25. Remember the key: this stock was $80, housing's coming back, BZH ain't going away. You can look at ten other sectors and see what has happened to the most awful companies, the road kill, the left-for-dead: LZB, ANN, LDSH. Once the market decides they aren't going under, up they go at a much faster pace than their peers.

Aug 13 05:00 PM

[SHartwell:]

There are a number of homebuilders sitting on large cash piles with much more moderate debt levels.

As soon as they are convinced the market is turning, they will seek to acquire the weaker companies.

And the weakest of them all is Beazer.

Aug 13 06:39 PM

[BRich:]

I completely agree with Stephen. There is no way Beazer is closing shop any time soon. They have too many projects currently underway and planned for the next couple of years to be expected to say buy buy.
Possitive Gross Margin 3Q2009! The others are not controlling there costs of revenue as well ha! Can you believe it?
I bought this stock at the mid $2 range sold it at $3.61 and bought more again when they dipped back to $2.94 and am riding it till they at least tripple then take it from there. Stephens a clever player. If you wanna play this game to win big follow market movements.

Aug 15 07:34 PM

[FLbuilder:]

A number of followups to your comments:

BRich - learn to read an 8K or 10Q. Beazer has positive gross margin in there most recent quarter. $5.1M to be exact (yahoo.brand.edgar-onli...)

However, I would not really jump for joy as that equates to a positive gross margin of about 3% on there sales. It is even more depressing when you realize that Beazer had $50M of overhead or SG&A expense vs. only $225M of revenue. Historically SG&A as a percent of revenue for homebuilders is closer to 8% of revenue. So unless Beazer somehow manages to double there revenue overnight, they have major operational issues still to overcome.

Stephen -

You completely ignored some pretty substantive points of my argument. Before I point those out, let me acknowledge that if you bought Beazer when it traded at 24 cents a few months ago good for you! At 24 cents would I invest in Beazer...hell yes. At that price the market is trading it like it will go bankrupt over-night. Beazer has enough cash to survive a little while longer.

Now for what you ignored...

Homebuilders almost always trade in a range of 1 to 3x book value. The higher end of the range when the industry is in good shape and the lower end when things are bad. Beazer has a big issue and that is that there book value is going to go down drastically over the next year. Why do I say that? Well I go back to my point above that without a 1 time gain on buying back there own debt, they would have lost $50M. There entire book value is only about $150M. So if you are willing to invest in a company that would lose 1/3 of its book value without a 1time debt buy back...be my guest.

This company will be trading under $2 within 12 months - I look forward to coming back to see your comments then.

SHartwell:
If you think any other homebuilders want to purchase Beazer and assume there $1.5 Billion in Debt (with only $450M in cash) and there land positions of which Beazer has already acknwoledged about half of which need to be sold or moth-balled because they cant make money on them...I would love to know who that company is so I can short there stock.

Aug 16 09:36 PM

[BRich:]

FLbuilder - Your head is too far up the ass of nit picking this company to miss the bigger picture. BZH was selling for roughly $80 dollars a share at its peak, to be exact I'm not sure.
To point out that their recent gross profit was only 3% of their revenue is completely beyond the point given these unprecedented economic circumstances where a possitive gross margin is a great sign among the home builder sector right now indicating a potential for a possitive net revenue within the near future. BZH has also cut their inventory of unsold finished homes 38% from just last querter. This left them with just 234 unsold finished homes as of June 30 2009.
Another bullish sign for a nice yield in this stock is that Beazer has been paying down their total liabilities on an average of about $100 million a querter for the past year. Given that home sales have been on the uptick for more than a couple months now and that unemployment is leveling off we should see a nice jump in Beazers gross margin and would not be surprised to see a possitive net income soon given all that I've mentioned and the fact that their recent net loss was only $28 million.
Their next querterly results should just be another encouragement for the housing sector which has gotten a lot of reiterating encouragement in the past few months. However theres a lot of uncertainty of where housing will go after the $8,000 tax credit for first time buyers runs out in December and the summer buying season of 09' is left behind us. Unless consumer sentiment and retail upticks month to month from now till October I'm likely to sell my Beazer around October then reevaluate. Again homebuilder shares especially Beazers are still bound to gain big from this uptick in the housing sector at least till October of this year.




On Aug 16 09:36 PM FLbuilder wrote:

> A number of followups to your comments:
>
> BRich - learn to read an 8K or 10Q. Beazer has positive gross margin
> in there most recent quarter. $5.1M to be exact (yahoo.brand.edgar-onli...;tabindex=2&ty...
>
>
> However, I would not really jump for joy as that equates to a positive
> gross margin of about 3% on there sales. It is even more depressing
> when you realize that Beazer had $50M of overhead or SG&A expense
> vs. only $225M of revenue. Historically SG&A as a percent of
> revenue for homebuilders is closer to 8% of revenue. So unless Beazer
> somehow manages to double there revenue overnight, they have major
> operational issues still to overcome.
>
> Stephen -
>
> You completely ignored some pretty substantive points of my argument.
> Before I point those out, let me acknowledge that if you bought Beazer
> when it traded at 24 cents a few months ago good for you! At 24 cents
> would I invest in Beazer...hell yes. At that price the market is
> trading it like it will go bankrupt over-night. Beazer has enough
> cash to survive a little while longer.
>
> Now for what you ignored...
>
> Homebuilders almost always trade in a range of 1 to 3x book value.
> The higher end of the range when the industry is in good shape and
> the lower end when things are bad. Beazer has a big issue and that
> is that there book value is going to go down drastically over the
> next year. Why do I say that? Well I go back to my point above that
> without a 1 time gain on buying back there own debt, they would have
> lost $50M. There entire book value is only about $150M. So if you
> are willing to invest in a company that would lose 1/3 of its book
> value without a 1time debt buy back...be my guest.
>
> This company will be trading under $2 within 12 months - I look forward
> to coming back to see your comments then.
>
> SHartwell:
> If you think any other homebuilders want to purchase Beazer and assume
> there $1.5 Billion in Debt (with only $450M in cash) and there land
> positions of which Beazer has already acknwoledged about half of
> which need to be sold or moth-balled because they cant make money
> on them...I would love to know who that company is so I can short
> there stock.

Aug 17 06:08 PM

[FLbuilder:]

BRich - AIG was trading at 1,500 on a split adjusted basis at its peak.

Guess you should go buy that company as well (and the $180 Billion that they owe the US Govt)

Aug 18 12:15 PM

[BRich:]

All I can say is that this stock is hitting at least five dollars a share within the next couple of months and that their balance sheet which I would normally run from is not a large enough threat in context of where the housing sector has been heading and the corolary potential upside for the stock to not ride the gravy train at least a couple more months.
Go Beazer...flees and all

Aug 18 05:53 PM