Beazer Homes: Hard Times Ahead

The homebuilder has a nearly impossible chance of meeting expectations for the current quarter according to one analyst who says investors should take the money and run.
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ATLANTA (

TheStreet

) -- Shares of

Beazer Homes USA

(BZH) - Get Report

are off considerably on Friday after the homebuilder posted a wider-than-expected loss in its recent quarter.

Revenue in the period surged 51.7% to $339.9 million, mainly on the back of homebuyers rushing to take advantage of federal tax credits, but tumbling home prices, a sharp drop in orders and backlog, and a cancellation rate that spiked 600 basis points to 29% paint a sober portrait of what's to come.

"The weak order trends signal trouble for the fourth quarter," noted Vicki Bryan, senior high yield analyst at Gimme Credit. "Beazer will have to convert an unprecedented -- and unlikely -- 143% of its backlog just to deliver the same number of homes sold in

the fourth quarter of 2009 (when sales were boosted by the November expiration of stimulus programs)."

Home sale closing volumes for most homebuilders were fueled earlier this year by consumers rushing to take advantage of the tax credits that offered as much as $8,000 for first-time home buyers. The still-struggling housing market saw sales ramp up in March and April since buyers had to have signed a contract by the end of April and initially had until the end of June to complete the deal. Lawmakers later extended the deadline to close on a home purchase and still qualify for the tax credit to Sept. 30.

Bryan said that "even if Beazer delivered its entire backlog in the fourth quarter (also an unprecedented conversion rate), with prices closer to the average backlog price (which implies a 5% increase in price year-over-year and a 13% increase versus the third quarter)," revenue could fall as much as 25% to $275 million.

"If so, this is significantly lower than the consensus market estimate of $337.5 million," the analyst stressed.

In that case, Beazer's fourth-quarter profits this year are likely to come in far lower than the $92 million it booked in the fourth quarter of 2009.

Bryan expects the homebuilding sector to remain weak and unprofitable for another year, underscoring the need for Beazer to preserve its cash, down almost 10% sequentially in the recent quarter to $472 million.

Beazer CEO Ian J. McCarthy said traffic and new home orders in the recent quarter were well above year-earlier results through the end of April, but after the tax credits expired April 30 traffic in May and June was substantially lower.

"While new home affordability and mortgage rates are at historically attractive levels, homebuyers continue to be concerned about employment, the impact of additional foreclosures and general conditions in the economy," he said, adding that "We believe employment growth and improved consumer confidence remain the keys to a sustainable recovery in the homebuilding industry."

McCarthy's sentiments echoed those of rival homebuilders that reported recently.

PulteGroup

(PHM) - Get Report

said Wednesday its

closing volume doubled last quarter

, year-over-year, to 5,030 homes thanks in part to the tax credit.

D.R. Horton

(DHI) - Get Report

said Tuesday it grew closed sales volume by 60% to 6,805 homes in the second quarter.

Beazer said home closings surged 73.3% year-over-year to 1,643 homes though new orders decreased by 32.5% due to the expired tax credits. The firm's backlog fell by 37% with a 33.1% drop in the sales value of that backlog.

McCarthy said he does not think aggressive promotions or purchase incentives should be offered to potential homebuyers as a means to ramping up demand now that the federal tax credits expired.

On a conference call with analysts and shareholders he said the post-credit waning demand was expected, and that holding the line on prices would be better for Beazer's profit margins in the long run, especially when demand eventually picks up organically.

Beazer said housing demand has likely hit bottom, the number of home communities it has open likely stopped shrinking, and that demand should pick up in 2011.

"Almost everyone now is concurring that we've hit the bottom, we are bumping along the bottom, and that subject to some improvements in the economy and certainly improvement in unemployment, we are going to see an upside," said McCarthy. "So that's what gives us confidence in saying that we need to get out there."

"We have to believe that unemployment will improve as we get through the next six, 12, 18 months," he said. "And that will release the pent-up demand for housing."

The Atlanta-based homebuilder's cancellation rate increased 28.9%, and the average selling price fell 12.3% to $206,200, attributed to the highest concentration of first-time homebuyers lured by the tax credits.

Sales of newly-built homes rose 23.6% in June

to a seasonally adjusted rate of 330,000, the Commerce Department said last month. The figure came in ahead of expectations after a revised record-low rate of 267,000 units sold in May.

>> Home Prices Weaken, Sales Rise

While any increase in the rate of home sales is seen as a good sign for the economy, homebuilders and the housing market in general, the uptick in June home sales still represented the second-weakest month on record after May's depressed figures. It was also 76.3% lower than the 1.4 million-peak in July 2005, at the height of the housing bubble.

Beazer booked a net loss of $27.8 million, or 41 cents per share, compared with a year-earlier loss of $28 million, or 72 cents per share. Revenue grew 51.7% to $339.9 million.

Beazer shares fell 2.9% at midday Friday. The

iShares Dow Jones US Home Construction

(ITB) - Get Report

, an exchange-traded fund that tracks the homebuilding sector and counts PulteGroup and D.R. Horton shares among its top three holdings, was lower by 1.1%. The ITB's top holding,

NVR

(NVR) - Get Report

, edged down 0.8%.

-- Reported by Miriam Marcus Reimer from New York.

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