The continuing housing market rebound in the U.S. has started showing signs of fatigue. According to the National Association of Realtors, pending sales of homes fell for the fifth straight month in October. This hints that rising mortgage rates and shrinking inventory, in turn leading to higher prices, may have hit affordability in recent months. However, all is not lost as other indicators (such as job growth) would point. For individual housing stocks such as AV Homes Inc. (NASDAQ: AVHI) and Beazer Homes USA Inc. (NYSE: BZH), the window appears to be still open, especially as the Federal Reserve recently decided to continue with its massive asset-purchase program, effectively continuing to fan interest rates lower.
Arizona based AV Homes Inc. undertakes homebuilding and community development in Florida and Arizona. The stock trades close to its 52-week high level after reporting vastly improved results for the quarter September 30. Revenues improved 22.2 percent to $35 million, but a sharp reduction in expenses led to a massive shrinkage in net losses to $1.9 million. Comparative figure for last year's same period was a loss of $11.6 million. The continuing improvement in results confirms the company is not very far from profitable operations, at least on a quarterly basis. Despite the 15 percent jump in the stock over the last three months, it is available at a mere 9 percent premium to the book value of $17.6. Another attractive metric is the debt equity ratio of just 0.37 which is quite low in an industry which operates almost entirely on debt.
Beazer Homes USA Inc. is another housing player witnessing a turnaround of sorts. The company reported a loss of $66.2 million during September quarter last year, but has managed to post a profit of $12 million for the same period this year. In the meantime, a revenue surge of 18.1 percent also helped the bottom line. This top line spike is largely attributable to the recovery in the housing market. Any which way, return to profitability is great news for the company which still has $33.9 million in red for the last 12 month period. While a focus on affordable single and multifamily homes has allowed the company to take advantage of the affordability-led recovery so far, a highly leveraged balance sheet is a cause of concern. Practically speaking, a debt equity ratio of 6.3 has potential of sucking profits enormously. A forward price earnings ratio of 13.2 indicates the company's profits are likely to see growth going forward. Despite the potential upside, Beazer is not a stock to buy and forget. Investors need to pay close attention to its financial performance which can be volatile.