A Low-Dollar Play on a 2013 U.S. Housing Recovery

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Beazer Homes USA (NYSE: BZH) is one of a dozen publicly-traded homebuilders I follow, encompassing a group with other popular names such as Hovnanian, Lennar, KB Homes, Pulte, and Ryland Group. While individual housing stocks have enjoyed a tremendous run over the last 12 months and the composite SPDR S&P 500 Homebuilders ETF has earned an impressive 45.61% return since January 1, there is plenty of reason for encouragement and support for an improving housing market going into the year 2013. With respect to the recent market sell-off related to concerns over the fiscal cliff, now may be the right time to consider initiating a position in housing if you believe we have found a short-term bottom.

Here are six reasons why Beazer Homes is a strong relative buy, following recent corporate events and economic data:

1) Investors have greater clarity into Beazer Homes’ underlying business prospects, following their Fourth Quarter and Full Year Fiscal 2012 Results released on November 12 . While the stock sold off more than 15% following the earnings release, I feel that investors should remain positive and the sell-off represented an “expectations reset.” Although the Company posted a wider-than-expected loss of ($2.57) per share versus ($1.22) estimate, Q4 revenue exceeded estimates by more than 10%, reporting revenue of $370.93 million versus consensus of $335.11 million. More importantly, Beazer reported Q3 new home orders of 1,110 units and a backlog of $479.1 million.

2) JPMorgan analysts came out on Tuesday and defended the shares, stating that recent weakness in the share price represents a buying opportunity. The firm believes Beazer’s turnaround plan remains intact and reiterated an Overweight rating and $18 price target on the name, representing more than 30% upside from today’s closing price.

3) Despite Beazer’s outstanding debt position, equity holders should be safe from dilution and further corporate action at least through mid-2013, following the Company’s reverse one-for-five stock split announced on October 11 and effective October 12. It seems overwhelmingly likely that if Beazer management were to propose a secondary offering of common stock, it would have done so already at an earlier date. Beazer shares have been trading for a full month post the reverse one-for-five split and two months since the annual shareholder meeting, so at the current time it seems unlikely such an announcement would occur. This decreased probability makes Beazer more attractive to shareholders than competitors such as Hovnanian (NYSE: HOV), which has also seen a strong rise in share price. Hovnanian has refrained from any form of shareholder corporate action, which makes me cautious as the current share price would present an attractive opportunity for debt-saddled Hovnanian to raise much-needed capital.

4) According to the S&P/Case-Schiller Index, 95% of tracked U.S. housing markets showed an incremental improvement between July and August, posting an average increase of 0.9%. Phoenix, Arizona, one of Beazer’s largest markets showed an overall increase of 1.8% according to Case-Schiller.

5) Beazer Homes is presenting at several upcoming conferences, with the UBS Building and Building Products CEO Conference taking place on November 15. These events should continue to garner interest with institutional investors going into the 2013 New Year.

6) Many analysts see three to five years of increased residential construction looking out to 2014 with the possibility of 1 million annual housing starts. Furthermore, the CEO of competitor Hovnanian Homes (NYSE: HOV) recently appeared on CNBC and stated the housing rebound is “robust” and in the “second inning” of a prolonged recovery.

While the broader housing sector may continue to provide gains for risk-tolerant investors through the next year, the share price of Beazer Homes appears to be more attractive versus the sector given a recent “expectations reset” and should provide a better risk/reward for investors willing to withstand the potential for moderate volatility.

johnmacris owns or manages a long position in Beazer Homes USA. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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