'Dog' Beazer Homes Outrunning the Pack

Beazer Homes (BZH), that flea-infested, bedraggled home builder dog of a stock, has not only learned to run but has left its peers in the dust since I recommended the stock on August 10 at $4 a share (article).

Less than 6 weeks later, it stands at $5.97, a fifty percent climb.

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Does this company continue to rise from the dead?

1. Technically, the stock price held firm despite a negative MACD cross and now has showed extraordinary outperformance on large volume. The startling four day run is tremendous when you take into account how badly Toll and Lennar plummeted over the same period.

2. BZH has learned to thrive as a junk yard dog. It's been able to take down its high priced debt for cash and lower its total debt burden. When I first presented BZH, debt was trading at 60 cents on the dollar for bonds trading out 4 years. Now, through BZH's actions, that same debt goes for 78.5 cents, pulling the junk down from 20% to 13%. How? Last quarter, it took out $55 million in debt:

"During the quarter, the Company repurchased $115.5 million of senior notes in open market transactions for an aggregate purchase price of $58.2 million, or an average price of 50.4%, plus accrued and unpaid interest. These repurchases resulted in a gain on the extinguishment of debt of $55.2 million."

Recently, Beazer went to the junk yard again, purchasing another $255 million for $177 million, expected to extinguish $73 million in debt. Its floated $250 million in new bonds (albeit at 12% interest). That new bond covers their purchases and sets them up for perhaps more junk bond buying.

I see a virtuous circle here. Buy back higher priced junk. Find new lenders at more favorable rates. Go back to the junk market. Each time, BZH takes down debt, lowers its total interest costs, and adds equity.

3. This stock was priced for bankruptcy. It has managed to find ways to rebuild. There are whiffs of hope in housing. BZH used to trade at $80 in its heyday. We've seen this play in other sectors: Chico's and ANN in apparel, Lazy Boy in furniture, Thompson Creek in mining. Once the market realizes you're not dead, it makes you leader of the pack. This junk yard dog goes much higher. See you at $15.

Comments

[BRich:]

What a run this stock has had in the past couple of weeks. I feel pretty lucky for upping my stake not too long ago before this recent boom started taking place.
I also like the terms of the recent $250 million debt issuance which includes a lien and principal payment obligations which shows some confidence about the future.
With existing home sales and new home sales coming out in the next couple days for August with respect to continued strength in mortgage applications and building permits I will be looking for a seven dollar hit by this weeks close.

INCREASING PROBABILITY OF AN EXTENDED OR NEW TAX CREDIT FOR HOME BUYERS IN 2010!

Sep 23 12:45 PM

[hoopsjoe:]

how will they pay off 1.5 billion dollars.how will they compete with bank forclosures.what about the convenants on there debt.remember 1987 market came right back.real estate market took 7 years to come back. they cant last 7 years.

Sep 23 08:12 PM

[Stephen Ros...:]

User:
They don't have to pay off all 1.5 billion. They just have to decrease it. Since June 30, they removed $255 million in bonds for a net increase in equity of $73 million. Each time they buy back high priced debt, they decrease that $1.5 billion, and, at the same time, they increase equity. The key will be an improving debt to equity ratio. It will make BZH more appetizing for banks to lend at more favorable rates. Look at what has already happened: 20% rates have declined to 13% in 6 weeks, still a high rate but a remarkable improvement. Now we have banks lending $250 million to BZH at 12%, something impossible 2 months ago. I expect the process repeats kicking rates lower.
Eventually, I expect BZH does a secondary offering at much higher stock levels and recapitalizes much the same as banks are doing now. Again, not too long ago, no one would have expected banks to be able to do that and still drive their share prices higher. Of course, the take down of debt and rebuilding of equity will buy BZH time until housing recovers. Thus, the start of the virtuous circle.

Sep 23 09:18 PM

[BRich:]

What a number today. But hey this was after a more than 7% increase the month before and is still up over 3% from the same month a year ago. Things over all still look on the up trend for BZH. Fingers crossed for tomorrow.

Sep 24 07:32 PM