Housing Exec: "We Were Misunderstood"
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Since issuing its quarterly earnings results on November 12, shares of Beazer Homes (NYSE: BZH) have shed 18% of their value. Allan Merrill, the company's president and chief executive that replaced Ian McCarthy last year, said in a recent UBS homebuilder conference that the company's results were “misunderstood” by investors, and went on to accept full responsibility for the confusion.
A key area that seems to be the source of the “confusion,” and also driving the stock declines is the company's growth prospects that on the surface appear weak. Citigroup analyst Will Randow said outright that the company is not in a position to increase its community lots next year, and worse, that a large percentage of Beazer's existing lots are currently "mothballed," according to a recent interview on CNBC. As a result, Beazer seems to lag the growth potential of its sector peers, such as D.R. Horton.
Merrill, however, says not so fast. The company, he said, is on course to spend twice as much on land and land developments this fiscal year versus last year. He also concedes that the average community count -- from which the homebuilder can record sales -- dropped, and that it may fall further in fiscal 2013. Not the best way to soothe investors if that was his intention, but it doesn't end there.
Merrill, who is also the company's former CFO, went on to say that community counts should accelerate in fiscal 2014, when the land investments the company is making today begin to translate into real estate closings. For the patient investor, the stock could pay off over the long term.
Quality, Not Quantity
Beazer -- with some $323 million in market cap -- is not trying to be all things to all people. The homebuilder is more focused on quality versus quantity and -- after exiting certain geographical markets, such as Denver, Colorado -- is not trying to gain a foothold in all 50 states. "I hope we don't have to go back to the future," Merrill stated. Indeed, now is not the time for Beazer to expand its geographical footprint, Merrill declared.
What Beazer is focused on is becoming an expert in the markets where it currently operates and growing its team of talent. One way they are attempting to do this is by adding new personnel in the areas in which they currently operate. They are looking for people with deep connections and an awareness of the real estate market in their respective cities.
Most recently, Beazer realigned its Mid-Atlantic business by splitting the Maryland and Virginia into separate groups. To spearhead those groups, Beazer brought on a couple of alums from rival homebuilders. The company hired Ed Gold and John Reeves as presidents of the Maryland and Virginia divisions, respectively. Gold is a Ryland Homes alum, while Reeves had stints at both Pulte Homes and KB Homes.
For investors who want to know what Beazer Homes is focused on, Merrill laid it out very clearly at the UBS conference: "We need to get gross margins up, sales per community up, community count up, and we need to get overheads down."
Homebuilder Leader Board
Also speaking at the UBS homebuilder conference, Larry Nicholson, chief executive of The Ryland Group (NYSE: RYL), boasted of the company's ability to grow its sales some 40% year-to-date. Unlike Beazer Homes, Ryland is focused on diversifying its geographic footprint. The company said at the conference that it is returning to the Las Vegas market, where it exited several years ago, because of an expected turnaround in the region. The company continues to invest in new lots and communities, and is on a path to grow its margins from a current 20% to a target of 22%, according to Nicholson speaking at the conference.
In his earnings response, Citi analyst Randow applauded D.R. Horton (NYSE: DHI) as the homebuilder whose stock is undervalued. He has a buy rating on the stock based on market value relative to future earnings. He says the stock is trading at six-times "normalized earnings estimates" while it has the potential to trade seven-times profit projections, according to the CNBC interview. It's a bullish call for a stock that has already advanced 42% year-to-date.
In its most recent quarter, D.R. Horton exceeded Wall Street expectations for earnings and delivered a bottom line of $0.30 per share, versus $0.11 per share in the year-ago-quarter. Both quarters included charges for write-offs and inventories, but last year's charge was higher than this year.
Taking the Good With the Bad
While the housing recovery is beginning to gain steam, not all in the real estate market is rosy. The Federal Housing Administration (FHA), which insures mortgages for lenders, is in financial trouble, according to The Wall Street Journal. The entity is facing a loss of more than $16 billion, based on estimates for a forthcoming audit, and will probably have to dip into the pockets of American taxpayers to reclaim solvency. For its part, Beazer Homes has some high hurdles to cross before it is in growth mode, but with its new found direction could be a welcome surprise for investors down the road.
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