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No "Great-Quarter-Guys" For You!!!


Do you feel lucky?

On first look Beazer Homes (BZH) Q4 was a complete blow-out: EPS of $3.61 vs. 3.11, revenues of $1.8b vs. $1.56b, record closings, etc., etc, etc. So why no "Great Quarter Guys!!!!" during the Q&A?

Because if you really dug deep into the report - like going to Yahoo Finance and clicking where it says conference call - you would have heard a very different story.

The run away revenues and EPS were the result of a mad rush to close several hundred sales right before the quarter-end, which pulled - according to management - $.18 out of Q1 and into Q4. A favorable tax adjustment added another $.09 to EPS. And the rest of the excess revenues and earnings came from, let's call it "aggressive selling" of low margin homes, which knocked down gross margins by 320bps. Why oh why such mad scramble Mr. Beazer-man?

Apparently, BZH wanted to catch up on the closing delays from last year's hurricanes, and wanted to unwind less profitable communities to focus strictly on where the big bucks are. Also, BZH did not want to get into a dog fight for labor resources with the other homies, whose fiscal year ends in December and they may be tempted to hog construction workers to pad their own Q4.

However, in my never ending quest to find a dark-lining in every silver cloud, the numbers just do not seem to add up. First, if Q4 sales pulled $.18 in from Q1, Q1 should come in around $2.05. But in a not so subtle way, BZH said that "about 18% of the $10.50 [est. for FY '06] will fall in Q1". That means that their non-guidance for Q1 is about $1.89 vs. consensus of $2.07 ($2.23 consensus minus $.18 used up in Q4). The doggie apparently ate the difference. Second, if BZH saved up its "high margin" sales for next year, shouldn't next year's revenues result in higher earnings?

There was also a long series of non-answers by BZH with respect to its announcement that they will be looking to buy back stock more aggressively rather than using the cash to buy land for future developments. This might have been in part triggered by a recent 13-filing by a large holder - Stonebrook Fund - demanding a buy back. But as late as last quarter, BZH remained unwavering in believing that excess cash was best reinvested in its operations. Could it be that the permanent plateau of prosperity for the homies many not be permanent after all? Or, this perma-bear skeptic asks, do they need the buy back to make the EPS number for next year, even though total net income will actually fall?

The stock ramped from the mid $50's to the mid $60's in the last 5 trading days, in no small part because, as a sell-sider put it, a 25% short ratio is simply "excessive".

And that my fellow Minyans was the best reason I could find for the stock to head north.

Toll Bros. (TOL) is on deck next week, and I fully expect their financial engineering to show good numbers. After the stock declines of the last couple of months, a bounce in the homies was the odds-on bet. It may continue with TOL's report, but that may also set up another good entry spot for Boo.
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Position in TOL, BZH
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