|Shares Out. (in M):||32||P/E||0||0|
|Market Cap (in $M):||320||P/FCF||0||0|
|Net Debt (in $M):||1,214||EBIT||0||0|
Buy BZH equity. BZH is a levered homebuilder that has managed to completely miss participating in the bull market of the last ten-plus years. Unlike most of its large competitors, BZH has created zero shareholder value since the end of the housing/financial crisis with its stock currently trading around the same price as it did in 2008. In its defense, BZH came out of the crisis with so much debt that it was always going to be impossible to aggressively compete with other builders with healthy balance sheets.
For the past several years, I’ve been content owning the bonds, which I believe have above average asset coverage, but the recent post earnings stock collapse has also created an opportunity in the equity. The Q2 numbers were weak with orders and backlog down 4.8% and 11.5% Y/Y, respectively, but what really spooked investors was the very large impairment taken on land in Southern California. But if you’ve followed this Company for a while, you probably weren’t surprised given that the land was acquired prior to 2007 in a very frothy environment and the recent pricing pressures in the SoCal markets makes this land less valuable. I believe the impairments remove an overhang and position BZH to monetize challenging assets and redeploy capital into more attractive markets away from California. This should improve margins and ROA over time, which may help BZH achieving trading multiples closer to those of its peers.
Stock performance aside, BZH’s operations have actually been surprisingly decent with consistent revenue and EBITDA growth and stable margins. The Company generates a healthy amount of FCF ($90 – 95mm per annum) and has been able to slowly delever over the years and has even been repurchasing both its bonds and stock in the open market – on May 30th, the Company accelerated the remaining portion of its $50mm buyback plan to repurchase $10mm of its stock in the open market. The current valuation is undemanding – at $9.99/sh, it trades at ~1.2x TBV and ~5.0x FY20 (September end) EPS. The Company has considerable tax assets and will not be a taxpayer for the foreseeable future – if you include the DTA, BV would increase to ~$16.50/sh. The tax assets clearly have value but how much is up for debate. At 5.6x EBITDA, the debt load is considerable but also manageable given the staggered maturity wall and the significant FCF that the business generates. The most near-term bond issue that matures in 2022 trades above par suggesting that the market is not concerned about the solvency of BZH.
While this is clearly not a buy and hold name, even if you happen to be a housing bull, I think it can easily trade back to $14.00/sh (was there only a few weeks ago) or even $20.00/sh (was there early last year) if the housing market continues to slowly grind higher, as I expect it to, and the Company gets to a run-rate EPS of $2.00 – 2.25/sh, which should be doable. And who knows, with any luck, an activist will take notice of the chronic undervaluation and push the Company into considering a sale transaction or perhaps even a creative deal that can unlock value of BZH’s substantial tax assets. Given the underperformance in the share price, it’s surprising that someone hasn’t shown up to push for a value creating transaction. Consolidation has picked up in the industry in recent years and somehow Beazer has never become a target even with its vast land holdings. The top three executives alone take home a total of $10mm a year and eliminating just these expenses would be worth a quarter to third of BZH’s market cap to a potential buyer. Obviously, there would considerable additional synergies should someone decide to make a run at the Company – you just have to take a look at the corporate nut here and the math becomes super compelling.
Company / Business Overview
Founded in 1985 and barely avoiding bankruptcy during the crisis, BZH is a midsized homebuilder operating in 13 states in the U.S. It is one of the few homebuilders that is not majority owned by a founder or family. The Company’s active operations are in the following states: Arizona, California, Delaware, Florida, Georgia, Indiana, Maryland, Nevada, North Carolina, South Carolina, Tennessee, Texas and Virginia.
The following chart summarizes the Company’s operating footprint:
The West region accounts for the largest portion of the Company’s operations as shown in the following charts. Note that the Dallas, Phoenix and Las Vegas regions drove the large increase in the West segment.
If you wanted to get more granular, the chart below provides market exposure for BZH as well as some of its competitors: