Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:
- The current price multiples.
- The consistency of past earnings and cash flow.
- How much growth we can expect.
Let's see what those numbers can tell us about how expensive or cheap Beazer Homes (NYSE: BZH ) might be.
The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share -- the lower, the better.
Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.
Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.
Beazer has negative P/E and EV/FCF ratios over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Beazer still has a negative P/E ratio but it has a five-year EV/FCF ratio of 7.2.
A positive one-year ratio under 10 for both metrics is ideal (at least in my opinion). For a five-year metric, under 20 is ideal.
Beazer has a mixed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates.
|DR Horton (NYSE: DHI )||55.7||155.7||NM||4.5|
|MDC Holdings (NYSE: MDC )||NM||NM||NM||2.7|
|KB Home (NYSE: KBH )||NM||NM||NM||3.1|
Source: S&P Capital IQ; NM = not meaningful because of losses.
Numerically, we've seen how Beazer's valuation rates on both an absolute and relative basis. Next, let's examine...
The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.
In the past five years, Beazer's net income margin has ranged from -54.8% to -3.4%. In that same time frame, unlevered free cash flow margin has ranged from -21.4% to 19.5%.
How do those figures compare with those of the company's peers? See for yourself:
Source: S&P Capital IQ; margin ranges are combined.
Additionally, over the last five years, Beazer has tallied up no years of positive earnings and four years of positive free cash flow.
Next, let's figure out...
How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.
Let's start by seeing what this company's done over the past five years. Because of losses, Beazer's past EPS growth rates aren't meaningful. Neither are any of its peers' growth rates, except DR Horton. And it's quite negative:
Source: S&P Capital IQ; EPS growth shown.
And here's how it measures up with regard to the growth analysts expect over the next five years:
Source: S&P Capital IQ; estimates for EPS growth.
The bottom line
The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a negative P/E ratio and we pretty much see ugly numbers all around. If you're salivating over Beazer's five-year EV/FCF of just 7.2, know that it's that low because of selling down inventory.
I like to keep an eye on housing because at some point there could be opportunities in the space. However, Beazer is a company I was down on since early 2008. Given the list of problems back then, I'd have to hear of a serious turnaround before I looked further. But if you find Beazer's numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.
To see the stocks that I've researched beyond the initial numbers and bought in my public real-money portfolio, click here.