Bear of the Day: Beazer Homes (BZH) – February 11, 2019

Beazer Homes (BZH Free Report) represents one sector of the economy that led the decline in 2018 and appears to be carving out a bottom at this point.


Homebuilders have been beleaguered by rising interest rates and soft demand as mortgage applications persist downward. Economist David Rosenberg posted this biting narrative on Twitter last week to sum things up…


“The definition of pushing on a string is when mortgage rates dive to 10-month lows and mortgage purchase applications still manage to drop for three straight weeks and down 1.8% from year-ago levels.”


On February 4, Beazer Homes reported December quarter earnings of $0.13 per share, missing the Zacks Consensus Estimate of $0.18 per share. This compares to EPS of $0.23 in the year-ago quarter.


Beazer, posted revenues of $402.04 million for its Q1 FY2019, missing the Zacks Consensus Estimate by 0.68%. This compares to year-ago revenues of $372.49 million. The company has topped consensus revenue estimates three times over the last four quarters.


So this 28% miss on the bottom line probably caught more than a few investors off guard since the September quarter delivered a big EPS 22.3% beat and the company had put together a big string of positive earnings surprises in the past two years.


My colleague Tracey Ryniec wrote about Beazer in late November after that Q4 FY’18 beat…


Beazer Homes is one of the largest single family homebuilders in the United States. It offers homes in Arizona, California, Delaware, Florida, Georgia, Indiana, Maryland, Nevada, North Carolina, South Carolina, Tennessee, Texas and Virginia.


With a market cap of $352 million, Beazer is headquartered in Atlanta.


Another Beat in the Fiscal Fourth Quarter


On Nov 13, Beazer reported its fiscal fourth quarter results and beat the Zacks Consensus by $0.21. Earnings were $1.15 versus the consensus of $0.94.


It was the 7th consecutive earnings beat in a row.


Revenue was up 14.4% to $761.5 million as the average selling price rose 6.6% year-over-year to $372,600.


It delivered 2,044 homes, up 7.4%.


Gross margin fell 40 basis points, however, to 21.6%. And unit orders were down 0.8% to 1,305 but that was impacted by Hurricane Florence.


It’s marketing itself as a first-time and active adult home builder, which it hopes should help it weather the higher mortgage rates. This is about 80% of its total sales.


First-time homes are in strong demand. Additionally, many older adults buying in an active adult community pay with cash so the impact of rate increases may be muted.


(end of excerpts from Ryniec’s Nov 28 report)


Growth Estimates Update


Since the company’s report last week, analyst EPS estimates have accelerated to the downside.


For the full-year 2019, the Zacks consensus has dropped 20% from $1.95 to $1.56. And FY2020 profit projections took a 17% hit, knocking the consensus down from $2.37 to $1.95.


2019 sales estimates (including the recently reported FY Q1) now sit at $1.98 billion, representing a -5.83% slide from the prior year.


What’s interesting about many of the homebuilder stocks in this environment is that several, including BZH, found their lows in late October or early November. This list would include Toll Brothers (TOL Free Report) , PulteGroup (PHM Free Report) , and KB Home (KBH Free Report) .


But while the stocks may have priced-in a lot of the slowdown in home buying, the profit outlook doesn’t appear to be improving any time soon.


The Home Builder industry group sits in the lower 7% of all Zacks Industry Ranks, with 10 of the 17 companies earnings a #4 Rank (Sell) or #5 Rank (Strong Sell) by virtue of the direction and magnitude of their EPS estimates.


There may be extreme values in the group, with P/E ratios in the mid-single digits. But until the trajectory of growth turns around, it may be best to stand aside. The Zacks Rank will let you know.


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2019-02-11 14:55:00

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