There have been some macroeconomic signs that America's housing boom is starting to show signs of fatigue, but those figures haven't really shown up in the earnings reports of most homebuilders. The one exception is Beazer Homes USA (NYSE:BZH). While most companies are still showing strong home sales and growing net orders, Beazer's fiscal third-quarter results showed some cracks in its growth trajectory.
Let's take a look at Beazer's most recent earnings results to see what happened at this homebuilder and why it matters.
By the numbers
|Metric||Q3 2018||Q2 2018||Q3 2017|
|Revenue||$511.5 million||$455.1 million||$478.6 million|
|Operating income||$17.5 million||$13.8 million||$15.6 million|
|Net income||$13.4 million||$11.6 million||$7.1 million|
The positive things we can say about Beazer's results are that the company is generating a profit, its profitability is up significantly from the prior year, and it beat Wall Street expectations of $0.39 per share in earnings. Beyond that, though, there isn't a whole lot to like about these numbers. Almost all of the company's revenue growth for the quarter came from higher average sales prices as total home closings for the quarter increased by 0.2%.
It's also worth noting that Beazer's net income increase is largely due to a lower corporate tax rate. Its gross margin (16.4%) is one of the lowest in the industry, and its selling, general, and administrative costs as a percentage of revenue (12.1%) are on the high end of the industry. A high SG&A expense rate can be forgiven if a company is growing sales quickly, but stagnating sales and waning new orders numbers are a sign that the company is a little bloated.
Speaking of net new orders, those were down 9.1% compared to this time last year. The one saving grace here was that net new orders outpaced total closings such that total backlog increased to $920 million.
In order to plug some of the holes in its sales growth, Beazer acquired private homebuilder Venture Homes earlier this quarter for $65 million. Management expects the deal to increase its scale in the Atlanta market, and the additional lots acquired in the deal will help to improve margins and returns on assets as the lots were purchased for less than what it would have cost to buy and develop unused land.
What management had to say
Here's CEO Allan Merrill's press release statement on his outlook for the company and the decision to buy Venture Homes:
Housing demand remains strong across our markets, driven by rising consumer confidence, steady job growth, improving wage growth and a limited supply of for-sale homes. These positive tailwinds have allowed us to balance the impact of rising mortgage rates and cost pressures for land, labor, and materials.
As we approach the end of our fiscal year, we are positioned to achieve our multi-year "2B-10" [$2 billion in annual revenue, 10% EBITDA margin] goal as well as our planned reduction in leverage. Looking into fiscal 2019, we remain optimistic about the fundamentals for our industry. With incremental contributions from the recently acquired Venture Homes communities, we expect to generate strong growth in revenue, net income, and return on assets while improving the efficiency of our balance sheet.
Hard to see the value in this homebuilder
Even before this less-than-desirable earnings report, Beazer Homes was already looking like an also-ran in the industry. Sure, it was able to reap the benefits of a booming housing market just like everyone else, but even with business booming, the company is barely turning a net profit.
Now, Beazer is starting to show signs of fatigue, its home closings are flatlining, and net new orders are starting to slip. Even more concerning is that Beazer is one of the first in its industry to show signs of strain. That is likely partially due to the types of homes Beazer offers, as most of its homes are geared toward either the move-up or active adult market, and its price point is unattractive to the largest buyer demographic these days: young, first-time homebuyers.
Even with shares now trading at some of their more attractive valuation metrics in a while -- its enterprise value to EBITDA ratio is the lowest in 10 years -- it looks like Beazer's business is starting to head in the wrong direction.