Low P/E Stock: Beazer Homes USA

| About: Beazer Homes (BZH)


Beazer Homes trades at a low Forward Ratio of 7.

Risks lie in the large debt levels, which are higher than industry norms.

40% upside potential over the next year.

Beazer Homes (NYSE:BZH) is a small-cap stock. I found it when I was screening for stocks with a P/E under 10 and a market cap under $300 million. The company makes and sells homes around the United States.

The housing recovery still has a long way to go in the US. This gives long-term upside potential to a company like BZH as fundamentals improve. That ignores the fact that the company is cheap on almost every metric.

The company has a market cap of $250.85M against sales of $1.79B. This gives it an astonishing low P/S of 0.14. The PEG ratio looks at growth compared to the current P/E ratio. The PEG for BZH is currently 0.23 indicating that growth is anticipated in the future.

I pay little notice to the book value of a homebuilder. When investors look for asset plays, they tend to exclude homebuilders. It is worth noting the firm has a book value of 19.92 giving it a low P/B of 0.36.

According to Yahoo Finance, the average earnings estimate for next year (September 2017) is $1.03 per share. This is based on the rating from 5 analysts. This would imply that the company has a forward P/E of 7.2 based on the average rating. If the company meets the low of analysts' earnings targets it will make $0.71. This would give BZH a forward P/E of 10. Even at the worst-case earnings estimates, you would have a fairly valued company. This means there is limited downside and plenty of upside to this trade.

I expect the company to earn the higher end of the average estimate ($1.3 per share). This is because housing is doing well at the moment. April new home sales were 23.8% higher than a year ago and the highest level since 2008. This will benefit a homebuilder like Beazer Homes.

The biggest risk that Beazer has is the amount of debt. This is small in the way of short-term liabilities though at $98,556K. This can more than be covered by the cash the firm has of $134,933K (and $55,603K accounts receivable). There is long-term debt of $1,459,605K, however. This gives the firm a debt/equity of 2.3. The company could find itself exposed as interest rates increase due to the extra payments on its debt. It is worth noting, though, that the company plans to reduce its debt by $170 million over the next 2 years. The worry of higher interest rates will also reduce home sales in the future. This is because mortgage payments go up when interest rates go up. A positive is that interest rates are not going to greatly increase anytime soon. These are 2 negatives to look at for Beazer.

I see upside potential of around 40% for BZH over the next year. That is based on the future P/E moving to 10, based on average analysts' projections for next year.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BZH over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.