FLbuilder

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

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)

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

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.

Selling Toll Brothers on Good News

Tom -

Good analysis.

Curious question for you though. How are you valuing KBH that makes it seem attractive to you? For example, when I value KBH just purely on its last quarter-end Book Value - it comes to about $9 per share ($683M in equity and 76M shares outstanding). KBH lost about $75M last quarter and that was with only $5M or so in impairments. I think you can assume that best case, they lose $50M a quarter for the balance of 2009 and end the year with about $580M in equity and a book value of $7.60. I doubt you would tell me that you would want to own KBH at $18 per share or 2.4x book value.

So I am curious how you value KBH and why you would own them.

Using your same scenario as you laid out for TOL - we could assume that KBH would have revenue of about $2B in 2010. You dont go into this much detail, but I can assure you that none of the homebuilders (besides NVR maybe) will make more than 15% gross margin on there sales for a very long time...until sales prices go up at least.

So KBH would generate $300M of Gross Margin (incredibly best case scenario). This past quarter they had about $75M of SG&A expense. So lets assume that at the very least, if they are growing there sales they will have a flat SG&A so annualize this past quarters run rate of $75M and you get $300M of SG&A expense.

Take the $300M of Gross Profit LESS the $300M of SG&A and you have 0 income. This is before any asset impairments or interest expense. In fact, I would tell you that I would expect KBH to lose around $100M in 2010 just from operations. Worse if they continue to impair land.

Just curious to see if I am missing something because I think KBH is the most over-valued homebuilder out there right now and you obviously feel differently.

Thanks

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

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.

KB Homes: Frozen on the Bridge?

This is really another example of uneducated bloggers/posters on SeekingAlpha and why you should take everything you read on here with a grain of salt.

This poster has probably spent 0 days in the homebuilding industry. I have spent about 10 years of my life in the industry.

A 20% cancellation is LOWER THAN THE HISTORICAL RATE FOR THE INDUSTRY. Historically, builders have had cancellation rates of anywhere from 20% to 35%. If you are signing up 70,000 buyers a year and 30% cancel, that is not a problem. If you are signing up 10,000 buyers and year and 20% cancel...you actually do have a problem.

Cancellations are such a terrible way to judge the new home industry at this point in time.

Stabilization of prices, volume of new orders, cash flow generation, and a return to profitability are much better measurements.

Ignore this guys article.

Short Housing for the Long Term

You are right to be bearish on the new home builders.

However you cant say that TOL has a bad balance sheet. How do you support that argument. Out of all the public homebuilders, they have propbably one of the top 3 balance sheets. How many of the builders have as much cash as debt on there balance sheet. MDC, TOL, and NVR.

Pleaese dont make uneducated comments because they diminish an otherwise accurate article.

The Next Leg up in Financials

Jason -

Man you have some misleading information in your post that you need to correct.

You are inferring that E-Trade will be transferring there mortgages at 100 cents on the dollar to a 3rd party and wont have any write-downs. This is categorically false. The 3rd party who is targeting there current customers is simply targeting them for new mortgage or re-finance business.

This will have no effect whatsoever on there distressed or de-valued assets.

I like E-Trade - but you are throwing out some categorical mistatements in a widely read forum and should know better than to do that.