Beazer Homes USA Inc. Demonstrates Resilience in a Challenging Housing Market

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Written By Jackson Hartwell

Beazer Homes USA, Inc. has reported three quarters of financials since the last review, continuing to exhibit resilience in its earnings performance.

Beazer Homes ended FY2023 with a notable revenue and EPS beat in Q4. Revenues declined by 22.0% year-over-year to $645.1 million but still exceeded estimates by $18.2 million.

Profitability decreased from FY2022, with adjusted EBITDA at $53.4 million, down 37.2% year-over-year, yet maintaining a healthy operating margin of 9.6%.

In FY2024, Beazer Homes’ revenues have shown signs of stabilization, with a 13.1% decline in Q1 and a 0.4% decline in Q2. Despite the Q2 revenues falling short of Wall Street expectations by $28.3 million, the quarter demonstrated stabilization. Profitability, although reduced, remained above pre-pandemic levels at 6.6% in Q2.

2024 Forecast

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Looking ahead, Beazer Homes anticipates a return to revenue growth. The backlog decreased slightly year-over-year in Q1 to $932.8 million but improved in Q2, showing a backlog of $1.08 billion, up 9.4% from Q2/FY2023. For Q3, Beazer Homes projects homebuilding revenues between $581 million and $606 million, with the midpoint representing a 3.6% year-over-year increase.

The FY2024 guidance sets significant expectations for Q4, with expected closings of over 4,750 homes, translating to at least 1,788 closings in Q4, up 45% from Q4/FY2023. While this guidance is ambitious, caution is advised as there may be a risk of missing the target.

Significant Mid-Term Growth Targets

Beazer Homes has ambitious mid-term growth targets. Following Q2, the company had 145 active communities and aims to reach 200 by FY2026, representing double-digit annual growth and a 38% increase in total communities.

The growth strategy involves the Zero Energy Ready Series homes, with all new builds by the end of 2025 targeted to be part of this series. These homes, although more expensive to build, are expected to generate better gross margins.

On May 1st, Beazer Homes reported the purchase of 174 acres of land to build 591 homes, with sales expected to start in Fall 2025.

Valuation Analysis

The updated discounted cash flow (DCF) model estimates FY2024 revenue growth at 8%, reflecting the year’s strong guidance. Subsequent years are projected with 9% growth in FY2025 and 8.2% in FY2026, tapering to 2% perpetual growth post-FY2026. The EBIT margin is now estimated at a sustained 6.5%, closer to historical averages.

The estimates place Beazer Homes’ fair value at $38.98, 37% above the current stock price. This valuation is supported by a weighted average cost of capital (WACC) of 11.58%, derived from a capital asset pricing model. The company’s interest rate is 7.70%, with an estimated higher debt-to-equity ratio of 50%.

Margin Risk

While the Zero Energy Ready Series is expected to enhance margins, caution is warranted regarding margin sustainability. The current trailing operating margin of 7.8% is significantly higher than the five-year average of 3.4% pre-pandemic. A reversion to historical margin levels could impact valuation negatively.

In the initial analysis, margin risk was a major factor. However, Beazer Homes has demonstrated good margin resilience, and a significantly lower margin scenario is not the base expectation.

Stock Appears to be Undervalued

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Beazer Homes has shown resilience in a slow housing market, with revenues beginning to grow and margins remaining above pre-pandemic levels. The company’s mid-term growth targets with the Zero Energy Ready Series homes offer potential for better margins.

Despite some margin risk, the stock remains undervalued if current margins are sustained, making Beazer Homes an interesting investment opportunity.


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