BZH - Beazer Homes: Balance Sheet Improvements Q4 2023 Results And Undervalued

2023-11-22 19:23:40 ET

Summary

• Beazer Homes reported impressive Q4 2023 results, including high earnings per share, free cash flow, and balance sheet improvements.
• Despite high mortgage rates, Beazer Homes expects another strong year in 2024.
• The stock is undervalued and trading below book value, making it a strong buy.

Summary

Beazer Homes USA reported impressive results for Q4 2023, including earnings per share, free cash flow, and balance sheet improvements. Solid 2023 fiscal results included over $5 EPS, Gross Margins of 23%, $272M of adjusted EBITDA, a 60% increase in cash, a 17% reduction in net debt, Equity increased by 17%, and debt to equity reduced to 59%.

Even with mortgage rates at 23-year highs, Beazer Homes expects another strong year for 2024. Trading at an over 25% discount to book value, this stock is an undervalued strong buy. Beazer Homes is also trading well below its liquidation value.

Beazer Homes

Beazer Homes is a homebuilder operating in 13 states in the US, constructing single and multifamily homes for preconstruction sale through commissioned new home sales counselors and independent brokers. The company recognizes revenue after the title and possession of the home are transferred to the buyer.

It operates in Arizona, California, Nevada, Texas, Delaware, Maryland, Indiana, Tennessee, Virginia, Florida, Georgia, North Carolina, and South Carolina.

2023 Q4 and Full-Year Results

Beazer Homes USA, Inc. (BZH) recently delivered impressive results for Q4 2023. Earnings per share of $1.83, free cash flow of over $75M, and a cash balance of $346 are all much higher than the previous quarter's results. Turning to the 2023 full-year results:

Beazer Homes followed up a record in 2022 with another very strong 2023. Over $5 EPS, EBITDA of over $270M, and their community count growing. Beazer Homes ended the year with a P/E ratio of about 5. From the conference call Allan Merrill the CEO's summary of the fiscal year:

From a financial perspective, we generated more than $150 million of net income, resulting in healthy returns on both assets and equity. We invested almost $600 million in land and land development, and at the same time, we strengthened our balance sheet with leverage now below 40% and stockholders' equity above $1 billion.

Great results, even after investing $600 in land/community count, Beazer Homes increased its cash position by 60% to almost $350M. Moving forward to the guidance for the 1st quarter:

As we can see, new orders and the community count are up nicely from the prior year, but new orders were down from the prior quarter. Comments from the conference call suggested that mortgage rates moving to 8% have had an impact on new orders as potential buyers need time to digest these higher rates.

While these higher mortgage rates have a negative impact on demand, they also impact overall housing supply:

US existing home sales drop to 13-year low in September

Home resales, which account for a big chunk of U.S. housing sales, declined 15.4% on a year-on-year basis in September.

"As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales," said NAR Chief Economist Lawrence Yun. "Higher mortgage rates are really hampering activity."

This is a major reason that home builders have continued to do well in a high-interest-rate environment. Very few folks are willing to sell their existing home - trading in their low mortgage for a new 7-8% mortgage. This has significantly reduced the housing supply leaving the new home builders as the only game in town. Beazer Homes also provided their 2024 full-year estimates:

The 10%+ growth in community count is impressive, as is the return on equity forecast. Also in the comments from the conference call:

Taken together, we expect to generate double-digit returns and continue to grow book value significantly. Achieving our target for double-digit returns will lead our book value per share to over $40 by the end of the fiscal year.

So Beazer Homes is guiding to another 10%+ growth in book value, even in the difficult high-interest rate environment.

Beazer Homes Balance Sheet Improvements

Beazer Homes has traded well below its book value for years. A major reason for this was their really weak balance sheet. Way too much debt, and a very high debt-to-equity ratio of 200%. As we can see below, in 2019 the net debt was over $1B while the total equity was close to only $500m.

In only 4 years, Beazer Homes has transformed its balance sheet. Cash has tripled, Net debt is down 40%, and book value has doubled. This much-improved balance sheet should have moved the stock price back to and above the book value of $36 a share as the other home builders have done.

Beazer Homes Liquidation Value

Last year, we wrote an article about a small-cap steel company called Olympic Steel, Inc. (ZEUS).

In this article, we looked at the liquidation value or "LV" of Olympic Steel. We used a simple formula for this calculation: Current assets - (Current liabilities + Debt). We came up with an LV of $33.65, 10% above its stock price. Since then Olympic Steel's stock price has moved above $50 a share. We feel the same should occur for Beazer Homes. The LV for Beazer Homes 2019-2023:

As we can see an impressive increase of over 300% in LV. So current LV per share is about $32 per share. This is a special situation buy for Beazer Homes. With a much-improved balance sheet, strong community growth, and continued strong margins and earnings make this stock a strong buy.

Our 2024 price target is $40 per share.

Investor Risks

We do not feel that higher mortgage rates pose a large risk to new home builders like Beazer Homes, as this would lower demand, but also lower the supply of homes.

Our main risk would be the Federal Reserve raising rates in 2024 sending the US economy into a deep recession. This would lead to large-scale layoffs and a lower demand for home purchases. Even in this scenario, Beazer Homes could now adapt with its stronger balance sheet.

Investor Takeaways

Beazer Homes is the only publicly traded home builder trading below its book value and below its liquidation value. With its much-improved balance sheet, this below-market valuation is no longer valid.

Also, the home-building sector continues to have strong secular tailwinds, as the supply of new homes has lagged behind new household formation for many years.

For these reasons, we have initiated a strong buy rating on Beazer Homes. Our 2024 price target is $40 a share, about a 50% increase from the current stock price.

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