Homebuilders Beazer & Pulte Are Still Attractive

Includes: BZH, PHM
by: Investopedia Advisor

Investopedia Advisor submits: Rising interest rates and a slowing economy are detriments of the homebuilding sector. But in spite of these worries, and slowing home sales in some geographic areas of North America, there are some companies worth a second look. Companies that offer generally lower priced homes, and have a broad geographic footprint, such as Beazer Homes and Pulte Homes, are worth this second look.

Here is my take on these two companies:

Beazer Homes (NYSE:BZH): Beazer offers affordable homes primarily for first time buyers and senior citizens in roughly 40 markets throughout the east coast, midwest, southeast, west, and central United States. The average sales price of homes the company offers was $271,300 in 2005.

I like this company for several reasons. First, because Beazer, particularly in the above-mentioned markets, is a well-known and respected name. The second reason is because it is geographically diverse. In other words, it isn’t dependent upon any one state or market for its revenue.

Also, the average home it sells is comparatively cheap to those of other homebuilders throughout the United States. These factors will help give the company some insulation, particularly if the housing market continues to slump.

Make no mistake. Like the rest of the industry, Beazer has experienced a slowdown in its incoming new home orders.

In fact, its backlog of orders as of June 30, 2006 is 9,449 homes, with a total value of $2.85 billion. This compares to a backlog of 10,635 homes with a value of $3.12 billion during the comparable period in 2005.

In addition, its earnings per share declined during the most recent quarter. For the third quarter ending June 30, the company reported earnings of $2.37 per share versus $2.50 per share in the same period a year ago.

Still, on a yearly basis I think the stock is fairly attractive. Management expects the company to earn between $9.25 and $9.75 per share (yes these numbers are correct!) in fiscal 2006. This is well north of the $8.72 a share the company earned in fiscal 2005. Again, to be clear, management has not given a forecast as of yet for fiscal 2007. It’s something I expect to see them do after Q4 in September. And frankly, based upon the current backlog, one would be reasonable to assume that earnings will be down in fiscal 2007. Still, the company is trading at about five times earnings, which is not too shabby.

Another factor that piques my interest is that the company repurchased more then a million shares during the third quarter under its existing share buyback program at an average price of $46.88. The fact that management is willing to tie up its precious capital buying back stock, rather then gobbling up land for future building, is in my mind a terrific vote of confidence in the company’s future earnings potential.

In short, I would put this stock on my radar screen and wait until the end of the fourth quarter for future earnings guidance. If management gives a more middle of the road, “soft landing” assessment of the housing market in its press release, I would consider buying in.

Again, the current earnings are attractive, and as I said above the company geographically mitigates a great deal of its risk, which is also a positive. But because I see no immediate catalyst in the near term to suggest a reason to buy, I would wait before pulling the trigger. This is a solid company. But at this point, it is more of a timing issue.

Pulte Homes (NYSE:PHM): Pulte Homes, like Beazer has a broad geographic footprint. It operates in roughly 53 markets in some 27 states. It sells homes ranging from $100,000 to roughly $350,000, with the average price in 2005 being about $315,000. Like Beazer, it too sells a significant amount of senior citizen-type homes.

Unfortunately, also like Beazer it has experienced a decline in new home orders. In fact, total new home orders during its second fiscal quarter ended June 30 totaled 9,455. That is down about 30% from the comparable period a year ago.

The silver lining in the cloud is that the company is pegging full year (2006) earnings to be between $4 and $4.30 a share, meaning the company trades at under 8 times earnings (again, an apparent bargain). At this point, based upon new order bookings, I certainly don’t think the company will have any liquidity issues heading into next year, barring a major housing collapse. Plus, given the current new order bookings, I really don’t think that management is going to knock down its guidance too far for 2007.

My point is that this too appears to be a solid company with a good name, and sizable geographic footprint that will insulate a good portion of its risk. And for that reason I think it makes sense to put it on a “watch list.” I suspect that near year-end there could be a sizable amount of tax loss selling (the stock trades near its 52-week low) and that the stock could go lower. However, if the overall fundamental picture remains intact at that time, I would then consider jumping in.

In short, I am moderately bullish on homebuilding stocks. Not from a perspective that they are ripe for a near term run. But from a bargain-hunter perspective. To that end, I would keep my powder dry, and wait for a more opportune time to buy these shares.

BZH 1-year chart:

PHM 1-year chart:

By Glenn Curtis, Contributor - Investopedia Advisor

At the time of release Glenn Curtis did not own any shares in any of the companies mentioned in this article.