The last three years have been a great time to be in the homebuilding business. The economy continues to grow, wage growth has started to pick up, and pent-up demand from millennials putting off their first home purchase until later than previous generations has created one of the tightest housing markets in decades.
Unfortunately, investors in Beazer Homes (NYSE:BZH) haven't been reaping the benefits of this booming market, as its stock is actually down over this time frame. What exactly has kept Beazer from enjoying the fruits of a robust housing market? Let's look at the company's most recent earnings report.
By the numbers
|Metric||Q2 2018||Q1 2018||Q2 2017|
|Revenue||$455.1 million||$372.5 million||$425.5 million|
|Operating income||$13.8 million||$6.7 million||$7.5 million|
|Net income||$11.6 million||($130.9 million)||($7.5 million)|
If we stack Beazer's results up against prior results, then this past quarter looks good, and there are signs that things will get even better. Revenue and net income are on the upswing, its debt metrics continue to improve, and margins are improving from higher home prices. Operationally, homes closed are still on the upswing, and net new orders continue to outpace closings to add to its backlog. At the end of the quarter, Beazer had a dollar-value backlog of $704.4 million, which was up 5.7% compared to this time last year.
However, once we start to compare Beazer's results to some of the earnings reports from its peers in recent quarters, it's abundantly clear that the company is lagging behind. Not only are most other homebuilders posting double-digit growth rates, but Beazer's net income margin of 2.4% also puts it at the low end of most homebuilders. One of the challenges for Beazer is that even though it has a presence in 13 states, it is still a small-scale player and doesn't benefit from the economies of scale that its larger competitors enjoy.
What management had to say
On the company's conference call, CEO Allan Merrill gave his high-level overview of the housing market today. Despite some headwinds forming, he believes the wind is still clearly at the company's back:
The market for new home sales remains healthy, as rising consumer confidence, favorable demographics, and strong job and wage growth encounter a limited supply of new and used homes across our footprint. This supportive backdrop has allowed us to increase our sales pace and more than offset rising costs, leading to revenue and profitability growth.
Of course, higher home prices, combined with rising mortgage rates, have highlighted affordability as a potential risk within our industry. We've anticipated this for several years, which is why we have been intensely focused on delivering extraordinary value at an affordable price.
A booming industry doesn't always translate to a great stock
Just because the housing market is booming, it doesn't mean that every company in this industry is going to benefit immensely. Beazer Homes' results may be on the upswing and management is making the right moves by deleveraging and looking to reduce its level of undeveloped properties. But the company is at an inherent disadvantage to its peers. It mostly serves the first-time buyer market with homes priced at a lower entry point. That isn't necessarily bad, but for a decent profit margin, you need great economies of scale.
Because of Beazer's lack of scale and the fragmented nature of the homebuilding industry, it wouldn't be surprising if Beazer were an acquisition target. However, at an enterprise value to EBITDA ratio of 19.1 times right now, it is priced at a significant premium to the rest of the industry. It's hard to see anyone out there looking to buy Beazer today when it is more expensive than others, which means that investors might not get much out of this stock in the foreseeable future.