ATLANTA ( TheStreet) -- Citigroup has intiated coverage of Beazer Homes ( BZH) with a buy rating. The bullish call on Beazer shares makes Citi the only securities firm with a buy rating on Beazer stock. The Citi call on Beazer is thematically linked to fears that Beazer doesn't even have the balance sheet strength to survive. Citi is making the argument, more or less, that Beazer shares are being priced as if existential risk for the company deserves to dominate outlook on the stock. Citi believes Beazer will survive, and the existential risk has made Beazer shares cheap. It's a common enough theme in securities research across many industries. A stock is being priced for bankruptcy, and that ultimately makes the stock an attractive opportunity for investors with a strong stomach. "For investors who are confident that BZH will survive, there is considerable upside in the stock relative to its current valuation," Citi wrote. Citi subtitled its initiation of coverage, "Cracks in Foundation But Property By No Means Condemned." Shares of Beazer reacted with a gain after the Citi initiation on Monday morning, up 3.5%, or 16 cents, to $4.72. Citi initiated Beazer coverage with a price target of $6.25. The current analyst consensus on Beazer shares is a 63 cent loss in the first quarter 2010, and an 87 cent loss for the full year. Beazer shares lost $1.22 in the final quarter of 2009. The Citi research report was far from a rave.
Citi wrote, "On the homebuilding side, we think BZH is a below-average operator. BZH's gross margins and inventory turns have trailed the peer group average, while its SG&A as a percentage of revenues has recently exceeded the peer group average. On the financial side, even after factoring in the recent equity issuance and the company's tax refund, we think BZH's balance sheet remains highly leveraged with a ~61% net debt-to-cap compared to the peer group average of ~29%." Beazer shares have fallen approximately $2 in value since September 2009 when shares hit a 52-week high. Citi also expects an upcoming debt deal to help Beazer shares fight back against arguments that its survival is threatened. Citi expects Beazer to issue intermediate or long-term debt next month and use the proceeds to call its outstanding 2012 debt, which would "effectively eliminate any existential concerns," the research report concluded. Citi's global banking operations have served as both an investment banker and securities offering firm for Beazer Homes in the past 12 months, and has served as co-manager for Beazer offerings. -- Reported by Eric Rosenbaum in New York. Follow TheStreet.com on Twitter and become a fan on Facebook.