Beazer homes

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Submitted by TheBreeze on August 5, 2007 - 8:08pm

Since Cramer said that one or more of the homebuilders may fail within a couple of weeks, and since Beazer recently issued a media statement refuting "scurrilous and unfounded rumors" about a prospective bankruptcy filing, I decided to take a look at Beazer's financial statements to see if they gave any indication to the trouble Beazer might be in.

During the search, I was able to find a couple of items that hint at some potential trouble. The first was a couple of statements made during an April conference call.

At the beginning of the call, the Chief Accounting Officer stated that: "At March 31 net debt to total capitalizations stood at 49.1%, down slightly from the December level, and within our target of 50% or lower."

Later in the call, the CEO stated that "We have made commitments to the rating agencies and to all of our fixed debt holders that we are going to keep our debt to cap under 50% -- at or under 50%."

So, as of March 31, Beazer was just barely fulfilling one of the commitments they had made to their debt holders.

Fast forward to the July call, and we discover that the net debt to capitalization ratio stood at 52.6%. Uh-oh. I assume this means that the debt is currently callable. Thus, that may be why Cramer said that one or more of the builders is in danger of failing within a couple of days or weeks. Interestingly though, in that same call, the CFO refers to the 50% ratio as just a "target", so it's unclear from this call whether that debt can be called in based on breach of that 50% ratio.

Another interesting item that I found in the July call is that Beazer negotiated a new revolving line of credit. However, this line of credit is dependent upon Beazer maintaining a "minimum tangible net worth" of $1 billion. The CEO went on to say that the company had a tangible net worth of $1.3 billion as of June 30. However, the current market cap of the company is only $441 million. Thus, either the market is willing to give away $1.3 billion for $441 million or the market is saying that the CEO's net worth calculation is not well calculated.

In that same call, the company mentioned that they were being investigated by the SEC. Beazer may also be under investigation by the FBI for mortgage fraud.

So, it appears that Beazer is close to being at the mercy of its creditors. If Beazer can continue to renegotiate it's debt obligations, they may be able to stay in business. If not, it looks like they are kaput. Even if Beazer's creditors don't call in the loans, it looks like Beazer is still in trouble. In the July conference call, Beazer said they had $129 million of cash on hand. According to their latest 10-Q (filed on 4-26; it appears the 7-26 10-Q is late), they burnt through $100 million in selling, general and adminstrative expenses. So, assuming a similar burn rate and that Beazer can't access the revolving credit line due to violation of the net worth covenant, Beazer may be able to survive one, or at most two, quarters with the cash it has on hand. So it looks like either bankruptcy or fire sales for Beazer.

Submitted by Allan from Fallbrook on August 5, 2007 - 8:31pm.

As an accountant, one of the warning signs you heed when it comes to a company in extremis is when they "draw (down) the revolvers".

In Beazer's case, this might be a sign that the jig is up.

Several of the other key players, such as Lennar, Pulte, KB, Horton, Toll, etc have also been bleeding pretty badly when it comes to quarterly losses. I think Beazer is in a more financially precarious position and I think another significant reverse might be the end - the end being BK, of course.

If that happens, it will be interesting to see what happens to other homebuilders as regards market reaction and stock price(s).

Submitted by bsrsharma on August 5, 2007 - 8:44pm.

When you say "kaput" or "BK" are you meaning Chapter 11 reorg or liquidation (Chapter 7)? If it is Chapter 11, it is no biggie; they can ride through the down turn. I think all builders will go through some sort of bankruptcy during the big bang - the question is can they reorganize or liquidate.

Submitted by Allan from Fallbrook on August 5, 2007 - 8:52pm.

This is a pure WAG, but a cursory look at their financials (provided in the post) would indicate the latter (Chap 7), rather than the former.

Risk is being punished on Wall Street right now, and there is little patience or mercy being shown. Given their rate of burn and the amount of exposure shown on their Balance Sheet, I would imagine they are in an extremely vulnerable position right now.

Add that credit crunch to the picture, and it becomes somewhat hard to imagine that someone is going to ride to their rescue in the instance of a margin call.

Again, just a guess.

Submitted by TheBreeze on August 5, 2007 - 9:09pm.

When you say "kaput" or "BK" are you meaning Chapter 11 reorg or liquidation (Chapter 7)? If it is Chapter 11, it is no biggie; they can ride through the down turn. I think all builders will go through some sort of bankruptcy during the big bang - the question is can they reorganize or liquidate.

No idea. I'm not an accountant, just a layman trying to see if I can figure out what's going to happen to Beazer. According to their March 10-Q, Beazer had $2.9 billion in inventory (land and homes), $462 million in what appear to be options on real estate, $200 million in cash, $66 million in receivables, and $526 million in miscellaneous assets. In that same quarter Beazer had $2.6 billion in total liabilities.

On the call, Beazer stated that their "tangible net worth" was $1.3 billion as of June 30. However, their current market cap is only $441 million. Thus, the market is saying that Beazer is worth ~$859 million less than what Beazer said on the call. My guess is that the market is saying that the $462 million in option contracts is worthless and that the inventory is now only worth around $2.5 billion. Is that enough of a write-down? That would be about %16.

My guess is that a 16% write-down is not enough. Although Beazer is still making sales ($800 million worth in the March quarter), I would bet that the inventory that they have left is stuff that is hard to turn and will get harder to turn. If the inventory turns about to be worth 70% of what it is listed at on the balance sheet, then Beazer's debt is basically greater than it's assets and they would be chapter 7 (right?)

I've made a lot of assumptions in this post, and I'm not an expert, so I would appreciate feedback from you experts out there to point out places where I've steered down the wrong path in this post. And thanks for the responses so far.

Submitted by temeculaguy on August 5, 2007 - 9:20pm.

I would worry about WCI because it is all over the florida condo market (current stock at $6 compared to years in the twenties), D.R. horton has a 5 year supply of land that is killing them, but, (and I hate to repeat anything cramer says) he mentioned Standard Pacific (SPF) as a company he wouldn't loan a nickel to right now if he was a lender. Of course he also thinks KB may go out of business but the Wall Street journal says they have a good cash flow. WSJ says Lennar has the best cash flow in the industry, I wouldn't short them right now, they may fall with the industry but not at the same percentage and they also look to be one of the survivors on the other side, in a five year comparison to the industry they are performing 50% better and only lost 1% in friday's slide when the other got killed.

Submitted by Allan from Fallbrook on August 5, 2007 - 9:29pm.

TheBreeze: In this case (and in my opinion), liquidity is the key. As far as Balance Sheet items go, only the cash and receivables really count as liquid. I don't know what makes up that $526MM in misc. assets and would need to see the notes to ascertain how liquid those assets really are. I'd also like to see their average DSO (Day's Sales Outstanding) for receivables; this is usually a good indicator as to how quickly they are turning their receivables.

The inventory and options are fairly illiquid, especially in today's market.

Homebuilders have notoriously low market caps, so be somewhat judicious when using that as a signpost. It appears, based on your numbers (and I would want to see an Income Statement to really comment), that Beazer has most of their net worth tied up in illiquid assets and their burn rate is excessive when compared to cash on hand. A good look at the liabilities side of the Balance Sheet would be informative as well.

One really severe bump and things could get really dicey.

Submitted by TheBreeze on August 5, 2007 - 9:58pm.

Allan: I didn't see anything on DSO's in the 10-Q.

TG: Have you shorted any of the homebuilders? I'd rather not short down here, but I may buy some put options with play money. I think having a few hundred bucks in put options on one of the homebuilders would motivate me to keep digging into these financial statements, which would help me to better understand both the financial markets and real estate.

Submitted by bsrsharma on August 5, 2007 - 10:00pm.

I looked up their income statement; they made a gross profit of 1.26B on a revenue of 4.27B last year. Unless, things are much much worse this year (they probably are), I would think they may survive with a Chap 11 rather than liquidate.

As a comparison, If I remember, Lucent was in far worse shape, almost no revenues - forget profits, during dot com bust but was still bought by Alcatel (of France). I read somewhere Chrysler has a net negative worth when divested from Daimler but was bought by Cerberus. Strange are the ways of Merger Maniacs!

BTW, Cerberus appointed ex Home Depot Chairman Nardelli to run Chrysler. Deaf guiding a blind?

Income Statement
Revenue (ttm): 4.27B
Revenue Per Share (ttm): 111.326
Qtrly Revenue Growth (yoy): -36.80%
Gross Profit (ttm): 1.26B
EBITDA (ttm): 188.63M
Net Income Avl to Common (ttm): -133.23M
Diluted EPS (ttm): -3.44

Submitted by PerryChase on August 5, 2007 - 11:08pm.

Great post, TheBreeze. Interesting to watch the new "developments" in the homebuilding industry.

Submitted by Allan from Fallbrook on August 5, 2007 - 11:47pm.

bsrsharma: Accounting for Chrysler or Lucent is going to be different than for Beazer, largely due to the fact that in both cases, they have significant physical assets (auto production plants for Chrysler, telephone networks for Lucent). Chrysler's net negative is mainly composed of unfunded pension liabilities and legacy costs.

I think this upcoming year will be particularly telling for the big homebuilders, especially after seeing their stocks savaged this year. Homebuilders don't enjoy very good market capitalizations and those capitalizations are in large part based on a pretty bare bones Graham's valuation (land + houses + Cash + A/R). Beazer's rate of burn would be a major concern, especially if they continue to have problems moving houses.

Submitted by temeculaguy on August 6, 2007 - 1:05am.

Breeze, i didn't short any of the builders because I am an idiot. I thought about it but I really didn't think it would go to hell this fast, subscribing to the "things unwind slowly" theory up until a few weeks ago. I completely divested myself from the market a while back except for 401 and 457 stuff, thinking stock markets tank fast, housing markets don't, further evidence that I should not be allowed access to sharp objects. A bunch of others have been playing against lenders like countrywide and winning big (JWM, capeman and a few others, it was in another post called "betting against the tan man" because the ceo of countrywide, angelo mozilo, is freakishly tan) so i bet they played against the builders and won there too. At this point I worry that it's too late because some have dropped 75% so there's not much left to drop. I am probably wrong on this too and next week I will downgrade myself from the standard sized crayons to the really fat crayons that come 8 to a box. Seriously, ignore any and all stock advice from me, I am the epitome of Albert Brooks in Defending Your Life, I came within inches of buying Yahoo in the beginning wussed out at the last second, if I hadn't followed my gut on that I'd be so rich I'd have a full time employee just to type my blog posts for me while I was fed grapes. Had another one I bought at 4, sold at eight and watched it go to 90, oh yeah and another time a buddy tried to talk me into qualcomm ten years ago but I put in a pool instead, he paid cash for a big house in old scripps on that one. The list goes on and on, it's a wonder I am not on the corner yelling at passing cars.

Submitted by bsrsharma on August 6, 2007 - 8:25am.

Allan,

If you assume Chrysler will never again make consistent profits, does it still have value as a corporation based on physical assets (less unfunded pension liabilities and legacy costs)? A casual observation of their product mix strength reveals Chrysler's profit making days are strictly in rear view mirror in the post $3 gas regime.

Submitted by Allan from Fallbrook on August 6, 2007 - 8:49am.

bsrsharma: Just curious about something. Why do you presume that Chrysler will never again make consistent profits? If I were to guess at this, I would cite a couple of factors: Too much dependence on big, gas guzzling SUVs (the Durango and the Aspen come to mind) and trucks, and a lack of investment in hybrid and fuel cell technology.

However, they've been written off before and have survived, so it will be interesting to see what happens.

The buyout deal was a hoot, though, wasn't it?

Submitted by Allan from Fallbrook on August 6, 2007 - 8:51am.

TG: That has to be one of the funniest posts I have seen in a while.

BTW, I love "Defending Your Life". Pretty much anything with Albert Brooks is funny. Talk about a mensch.

Submitted by PerryChase on August 6, 2007 - 9:16am.

How about another bailout for Chrysler?

I think that big businesses are of the universal healthcare bandwagon and will be pushing for that. It's a good way to shift responsiblity for employee and retiree healthcare onto taxpayers.

Submitted by bsrsharma on August 6, 2007 - 9:48am.

Chrysler will never again make consistent profits - my prediction is based on reasons you mentioned. Very weak R&D in the areas of fuel efficiency, hybrids, electrics, alternate fuels etc., Excessive reliance on Trucks & Vans for profits, A history of quality problems. If Iacocca could not save them, it is hard to imagine the Home Depot guy will be their savior.

But I think what Cerberus has in mind is to pretty much liquidate US production and become an "asset lite" company. They will then brand either imports with their name tag or get their products OEM'd abroad a la Dell or HP. This is already happening with GM's Chevy Aveo. Private equity is not dumb enough to believe that they will make money by keeping production in US. It will be interesting to see how they will wriggle out of their pension/medical obligations though.

Submitted by fromnj on August 6, 2007 - 4:40pm.

Could someone explain what this mean too?
I googled to the debt to capital ratio, but I could not understand what is good/bad. Is there any benchmark published somewhere?

The following link is the news about standard pacific with credit concerns related to beazer.

http://www.bloomberg.com/apps/news?pid=2...

Submitted by patientrenter on August 6, 2007 - 11:16pm.

tg, funny post! I too have a long list of idiot failures to act on my hunches, even when I was damn near certain. My latest is just a few months old. I was feeling really good for lots of reasons about the Yen moving up. This was when it was over 122. But I didn't have a broker account that allowed me to trade the futures. I kept putting off opening that broker account, thinking about it once every 2 or 3 days, but only when all the offices were closed. My plan would have paid off well over $100K. Not enough for a scribe to write my posts, or peel grapes for me, but.... sigh... I have lots more

Lesson for both of us.... Go with the hunches... and get off duff and execute them.

BTW, looks like you have that home of yours in your crosshairs and just need to pull the trigger when you're ready're. Congrats.

Patient renter in OC

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