Should You Bet on a New Day Dawning for Beazer Homes?

Beleaguered homebuilder Beazer Homes USA (NYSE: BZH  ) seems to be finally gaining some business momentum, recently reporting its first annual operating profit of the past five years. The company was one of the most highly leveraged of the major homebuilders, a condition that almost sank Beazer during the financial crisis. 

Fortunately, the housing market's resurgence, evidenced by rising home sales and prices, has allowed Beazer to refinance its outstanding debt and shore up its financial profile. So, is the time ripe for investors to bet on this small cap?

What's the value?
Beazer is one of the country's 10 top homebuilders, based on volume, constructing roughly 5,000 homes annually across a geographical footprint of 16 states. While the company pursues buyers at a wide range of price points, it focuses on the entry-level segment with a company-wide average price for its home sales of approximately $253,000. 

Unlike some of its competitors, it attempts to reduce risk by only buying land that has received the necessary legal entitlements, thereby avoiding the costly and time-consuming zoning process.

In FY 2013, Beazer enjoyed solid top-line growth, up 28%, thanks to double-digit gains in both sales volumes and average prices. More importantly, the company kept a lid on its corporate overhead, providing a strong boost to its operating profitability. The net result has been a more favorable view of the company by creditors, in the form of lower funding rates, providing the capital to more than double its land purchases versus the prior-year period.

Best of breed
Of course, despite financial improvement in its overall operations, Beazer still suffers from a relatively leveraged balance sheet, with debt constituting roughly 80% of its capital structure. That is a competitive disadvantage in an industry that requires financial flexibility to make large land purchases years ahead of time in order to fund future growth. As such, investors should probably stick with financially prudent competitors that can pursue investment opportunities throughout the economic cycle.

In the mid-market segment, Meritage Homes (NYSE: MTH  ) is a top operator with a focused operating footprint of seven states, concentrating its business in high population growth meccas like California and Florida. While the company similarly pursues the full gamut of home purchasers, it focuses on the move-up category, reporting an average price for its home sales of approximately $329,700, significantly more than Beazer's average. 

Like Beazer, Meritage has also started getting more aggressive in the land-acquisition arena, recently agreeing to purchase Phillips Builders in order to cost effectively gain entry into the Nashville, Tenn., market.

Meritage has reported strong top-line growth in FY 2013, up 54.2%, courtesy of a favorable pricing environment and double-digit volume increases across its business units. The company has benefited from a large presence in technology havens, like California and the Carolinas, which has allowed it to leverage off of the tech industry's job growth.  The net result for Meritage has been sharply higher adjusted operating profitability in the current period.

In the luxury market, Toll Brothers (NYSE: TOL  ) has the pole position with an operating footprint of 19 states, providing a presence in most of the country's major metropolitan areas of affluence. The company serves the upscale market segment exclusively, adding an apartment development and management unit to its traditional homebuilding operations in 2003. Like its major competitors, Toll Brothers has been very active in the land-acquisition arena, recently agreeing to buy competitor Shapell Homes and its 5,200 lot positions in Northern and Southern California.

As one would expect, Toll Brothers has also reported strong financial results in FY 2013, reporting a 42% top-line gain. Despite an average sale price of roughly $717,000, the company generated a 27.3% increase in sales volume, indicating that consumers continue to gravitate to trophy properties. Of course, Toll Brothers is the direct beneficiary of that trend, with a sizable gain in operating profitability during the current period, providing the firepower to buy competitors and increase its community counts.

The bottom line
The Federal Reserve's excessively low interest rate policy has been a boon to the housing industry, propelling prices higher and improving the fortunes of nearly all participants, including Beazer. However, the company's relatively weak financial position should give investors pause and cause them to search for better opportunities elsewhere. 

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