Things Look Bad at Beazer

Beazer Homes' (NYSE: BZH  ) latest quarterly report cements its place among homebuilders hit hard by the housing downturn. The company's third-quarter losses more than doubled to $59.1 million as home closings and revenue slumped.

The fact that the housing industry is weak is not news, but for Beazer, there may be greater concerns than just the current poor performance.

The numbers
Beazer's homebuilding revenue plunged 47.6% from the year-ago quarter, to $168.4 million, driven by a steep 49.2% decline in home closings.

One positive thing to note is the 23.7% rise in net new home orders. This is interesting, as most homebuilders have reported falling orders, saying the expiration of federal tax credits has kept new homebuyers at bay. KB Home (NYSE: KBH  ) , which, like Beazer, targets first-time buyers, reported an 11% fall in net orders in its just-concluded quarter.

As a result of falling revenue, Beazer's net loss rose from $27.8 million to $59.1 million year on year. This includes a loss of $3.4 million from discontinued operations.

Although Beazer's cancellation rate remained high at 24.3%, it was well below last year's 29.3%. Another positive point is a rise in backlog units from 1,175 to 1,848 year on year. This translates into projected future housing revenue of $437.9 million, up from $288.2 million last year.

Questionable financials
Beazer's inventory has risen from $1.28 billion in the year-ago quarter to $1.31 billion. A rise in inventories isn't good if it does not translate into growing revenues. And, unfortunately, the company's inventory turnover ratio has in fact fallen from 0.9 to 0.5 year on year.

What looks almost horrendous is Beazer's capitalization. Its total debt-to-equity ratio stands at an unbelievable 618%. Compare this with the ratio of other players, and Beazer's could easily pass off as the highest of its peers.

KB Home's total debt to equity is among the highest at 3,812% in its latest quarter. The bigger players are in much better positions. PulteGroup (NYSE: PHM  ) , for instance, had a total debt to equity of 164%, while Toll Brothers (NYSE: TOL  ) had a comparatively better one at 66%, in their last-reported quarters. NVR (NYSE: NVR  ) stands out with an extremely low ratio of 5.9%.

To top the ridiculously high ratio, Beazer, like many in the industry, has been reporting operating losses for the past few quarters, and cash and equivalents have fallen from $472 million to $274.6 million year on year.

In a bid to boost profitability, Beazer has a strategy of buying and then renting out foreclosed homes. The company will now extend the program, which will be an off-balance-sheet move, to more cities and invest not more than $20 million in it. How well this works out for Beazer remains to be seen.

The Foolish bottom line
With revenue slipping and an unhealthy balance sheet, I am not very enthusiastic about the Atlanta-based company. Uncertain housing industry conditions, stricter lending norms, and the removal of sales boosters like federal tax credits further add to the gloom. I'll be staying away.

What do you think? Let me know using the comments box below.

Neha Chamaria does not own shares of any of the companies mentioned in this article.

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