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Minyans....Start Your Engines


...BZH won't be able to hide "net income" behind the buyback.


Aside from my non-stock-market related interest in real estate, I have recently been spending an inordinate amount of time sifting through data regarding the homies. That's because my long-haunting ghosts of a housing induced collapse of the broad economy are taking clearer shape, and are paying visits to types usually immune from such hallucinations. Witness the comments in this article by the chief economist of the National Association of Home Builders: "If there is a sudden unloading by speculators, or if interest rates go up more than a few points, it could spark a quick reversal. . . . Estimates suggest that as many as four out of every ten purchases in some places were by investors, some of whom . . . are depending solely on appreciation to float their boats and not even renting the units. . . .The downside to the economy resides largely within the housing sector."

We know by now that housing is slowing; the key to its contagion will be the speed at which it heads south: this is a spreadsheet of quarterly new orders for homes as reported by five homebuilders: Toll Bros. (TOL), Beazer Homes (BZH), Meritage Homes (MTH), MDC Holdings (MDC), and D.R. Horton (DHI). It covers FY 2003-2005 for each. It has nothing that allows forecasting the future, but it may provide a good point of reference as reports and forecasts by the companies begin to roll out.

First in the reporting parade is Beazer (BZH), which will release results on Thursday morning. BZH is the company I watch most carefully because I view it as the "canary in the coal mine." As a long standing entry-level builder, it is likely to be hit first by first-time homebuyers giving up on the holy grail of "housing-at-any-cost." BZH has recently been trying to "diversify" up the price ladder, and has jumped in the condo market, both moves that have significantly increased its risk profile. Lastly, even in the midst of the biggest bubble in memory - of any asset class - BZH managed a nine figures wipe-out with its bungled Crossman acquisition.

Here is a preview of the quarter: BZH already slashed EPS guidance for Q1 and Q2 of '06 during last quarter conference call, and the blue lines on these 2 charts (Here and Here) (courtesy of Bloomberg) show the recent drastic downward revisions by analysts. Therefore, BZH should not be at risk to come in below EPS consensus. How it matches EPS expectations is far more important.

Over the last few weeks BZH announced a shift away from land banking to start an aggressive share repurchase program; and yes, I do think that the recent ramp in the stock price has been largely the result of the buyback. However, BZH won't be able to hide "net income" behind the buyback. If net income comes in below consensus of $88M, was the EPS "meet" just a function of lower share count (last Q shares outstanding were 45.93M)? Will revenues make the $1.05b mark? And what's in the cards for gross margins? Did the talk-down of gross margins in last Q call lower expectations (25.1%) enough? ASP's are probably not at risk because they reflect the backlog contracted during the better part of last year. In fact one would even expect ASP's to continue showing growth. But expectations for new orders (estimates on the spreadsheet are from JMP Securities) still seem way too high to me given the recent trends, and order ASP's might begin to show some weakness.

Finally, given the endless financial engineering available to companies to "make" the numbers, here are the lowest Street estimates for Revenues, EPS and NOI for the next two quarters: $957M and $1.13b; $1.80 and $2.13; and $81M and $ 97M. If somehow BZH were not able to pull together at least the above, hard-hats will do very little for this homie.

If the housing bubble has reached its apex, as seems to be the consensus, the homebuilders' data over the next six months should tell us a lot about the looks of things on the other side of paradise.

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Position in BZH, TOL
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