Bricks and Mortar: Home Solutions Has Problems
04/26/07 - 02:50 PM EDT
Nicholas Yulico
Editor's note: "Bricks and Mortar" is a series of columns written by real estate reporter Nicholas Yulico meant to help TheStreet.com readers generate real estate and gaming-related stock ideas.
Deep down, management at Home Solutions of America(HSOA Quote - Cramer on HSOA - Stock Picks) must be hoping for another massive hurricane season this year. Because without the very lucrative business of cleaning up the damage, the company's margins and revenue growth will both fall substantially. I'm adding Home Solutions to my Bricks and Mortar coverage as a "flagged" stock, because I think the company, despite what management says, is still just a hurricane play that remains a risky bet for investors. The stock, at around $5, has already fallen 65% from its 52-week high set last summer. But I suspect more downside remains. There is a reason for the stock's 34% short interest. Gone are the company's days of recording lucrative contracts for the quick cleanup of businesses and homes ravaged by Hurricane Katrina and two intense storms that hit Florida in 2004 and 2005. What lies ahead is much murkier. The company's high-margin disaster-recovery work is now being replaced by a lower-margin cleanup and restoration business related to new construction. Some of this consists of demolition projects for builders. Much of the new work will come from government contract jobs in New Orleans, where bidding can be intense. The company's cabinet-making business will suffer from the residential housing slowdown. On first glance, the stock may look cheap. At $5, Home Solutions trades at a price-to-earnings ratio of 8.2. But that's based on a 2007 earnings estimate of 61 cents a share from the lone analyst covering the stock: David Yuschak at Sanders Morris Harris.
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