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Beazer Homes: Stop Hoarding Cash And Return It To Shareholders

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  • Homebuilder Beazer Homes is trading at 5x EPS and has half its market cap in excess cash on its balance sheet.
  • Interest rates are likely to remain low for long, aiding the housing market and preserving the earnings power of the company.
  • The stock offers 60% upside if management can immediately take steps to return cash to shareholders.
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Modern Custom Suburban Home Exterior
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As the market continues to rise, and people chase flashy momentum names, there are some stocks being left by the wayside. I'm finding opportunities in the home-building sector, with many of the companies trading at single digit multiples.

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This article was written by

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Run a long/short partnership. 25 years of experience in business and finance. CFA charter holder. Analysis is fundamental, focused on the numbers and takes a skeptical view of company declared pro-forma figures. Available for educational and entertaining speaking engagements. Institutional investors looking for short ideas may contact me.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of BZH, TMHC either through stock ownership, options, or other derivatives. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (6)

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A blast from the past...Company did nothing for shareholders, but after a wild ride, the homebuilder boom has lifted all boats. Getting out of the stock now.
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Folks, earnings out yesterday were good, with a benefit from energy efficiency tax credits. I guess feeding at the government's trough is what is in vogue in today's woke world! Company reduced debt by $50 million and sees itself generating $5 of EPS. That is good as they have now put a stake in the ground by publicly announcing it. What I didn't like: weak orders (I somewhat believe the company that they are intentionally throttling this) and weak cash flow (home inventory up by all of earnings in the last year).
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Thanks for your perspectives. Debt repayment isn't a bad idea, certainly better than holding on to cash. To put some numbers here, rather than just a qualitative "they have so much debt", interest expense was less than a third of operating income last quarter. (Interest expense for homebuilders is not obvious on the income statement as they capitalize and then expense it in the cost of homes sold. I wish this were not allowed and they had to present it the conventional way. You have to add interest expense to the reported operating income, to get an adjusted figure, then see what the below the line interest expense is as a % of this). I'm generally comfortable with a quarter of operating income going towards interest - if operating profit halves, debt can still be comfortably serviced. So by this measure, some amount of debt repayment (to the tune of $200 million) would be justified. However, they have to buy their debt back at a premium. If they did $100 million of that over the next year and a scheduled $100 million repayment next year, it would be taken care of. Along with cash generated over the course of the year, this can be done in addition to what I have outlined in the article.
All excess cash should be used to reduce debt and this is the core of company’s financial strategy. Agree that BZH is one of the cheapest of the homebuilder stocks and should be trading closer to $30 not $20.
Thanks to the (once in a lifetime) housing boom, BZH has done well TTM. After the recent 30% drop, its current share price is actually a bargain. Fortunately mgmt remembers the near death experience during the financial crisis, when BZH was caught off guard and way overextended. Super low IR over the last decade allowed it to survive and, recently, start thriving again. I'm glad I held onto my position even as BK was looming, but hope mgmt will con't sticking to its conservative position and not do any of the things the author is suggesting except further deleveraging.
Return to shareholders while holding so much debt? That is patently ridiculous and irresponsible. As a shareholder I want them to pay off debt, so to irresponsibly hand out cash merely for a short term sugar high and price pop would destroy my confidence that the company has shed the irresponsible practices that got us in this mess to begin with. Get debt below $500 million and then we can discuss dividends. In the mean time, as debt is paid down profits will increase by cutting the amount of interest paid at the high interest rates Beazer currently pays. This will create a growing earnings cushion and better credit ratings for lower finance costs to insulate us from the next inevitable bust.
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