Disclaimer: The views expressed here are mine and may change without notice. Past performance is not indicative of future results. All investments carry risk, including financial loss. This analysis is for educational purposes only and does not constitute investment advice or recommendations of any kind. Conduct your own research and seek professional advice before investing. Please see important disclaimers here and here.
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One area of bargain hunting I focus on is out-of-favor industries. Right now, homebuilders fall into that category due to widespread concerns about housing affordability. In this post, I highlight one such company where I believe the current market price likely understates the business's value to a private owner.
The safest and most potentially profitable thing is to buy something when no one likes it. Given time its popularity, and thus its price, can only go one way: up.
A case in point is Beazer Homes (Ticker: BZH). In the bull market of 2023, it sold as high as $35 per share. Recently, the company's common stock was selling at $19.56, much less than the tangible book value of roughly $36 per share. This value is after deducting all liabilities and capitalized interest costs.
The foregoing assertion warrants carefully analyzing the tangible book value. The major portion of the $36 per share resides in Beazer's inventory which is primarily land and homes, based in California and the smile states. These geographies are seeing a growing population with benefits from migration from other states. These facts provide support for the $36 value. Could that inventory face impairments, like the severe 60% markdowns seen in the 2008 housing crisis? It's unlikely. First, the weak underwriting practices of the pre-2008 period have almost disappeared. Banks have stronger underwriting standards and are not issuing "easy" loans. Second, the housing market has no excess inventory as was the case in 2008. Third, there are a few foreclosures now. Fourth, more than half of Beazer's active lots are on option contracts, reducing the company's risk (in 2008, it was under 20%). Lastly, there is limited land supply due to restrictions and lack of infrastructure.
If the inventory is fairly secure, why can't the company still lose money with weak future demand from high-interest rates? The answer is not complicated. First, the company has had a steady record of earnings in the past 10 years. Second, inventory could be turned into cash during times of distress to pay off debt. Additionally, the company's debt profile is manageable, with no significant maturities until October 2027. Management also anticipates further debt reduction this year, supported by ongoing earnings.
Beazer’s management team has demonstrated commendable operational improvements and prudent capital allocation. The former point is evident by analyzing company's balance sheet over the past approximately 10-years.
Despite a modest 30% increase in assets and a reduction in the surplus account (with some offset from debt reduction), Beazer’s equity expanded by nearly 350%, primarily driven by retained earnings. This indicates a significant enhancement in the company’s earning power, likely reflecting improved operational performance. Furthermore, the company’s financial position strengthened remarkably, as evidenced by a substantial decline in the net debt-to-equity ratio.
On the capital allocation front, management has shown a strong understanding of how to best deploy shareholder capital, as evidenced by significant share repurchases when the stock declined.
While we remain committed to both growth and deleveraging, the current macro environment and our share price have caused us to reevaluate our capital allocation priorities, presented with the opportunity to buy back stock at less than half of book value, we think it is appropriate to slow the rate of growth in our community count and the rate at which we are deleveraging. Today, we announced that we have received board authorization to repurchase up to $100 million of our stock. That's nearly 20% of our current market cap.
- Chief Executive Officer, fiscal Q2 2025 earning call
This is precisely the kind of shareholder-aligned behavior I like to see when a company's stock is trading below intrinsic value.
Based on the facts and reasoning outlined above, I like Beazer’s common stock as it offers a significant margin of safety and the potential for attractive long-term returns. Cases like this exemplify my investment approach—seeking opportunities in unloved and hated areas of the public markets.
Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).
