Beazer Homes (NYSE: BZH) Breaks Out Again, Are Shares Headed Higher?

Back in August, Beazer Homes (NYSE: BZH) staged a powerful breakout, with the move coming on high volume and the closing price right around the day’s highs.

After slowly, but steadily increasing for much of the fall, Beazer formed a four-week base between mid-November and mid-December. On Thursday, shares cleared that base, again doing it on high volume and closing near the day’s highs. Over the past two sessions, shares have held the breakout, but taken a breather after the strong move.

Beazer’s bullish price action can be attributed to the bullish news that continues to come out of the housing industry.

Record Highs and Record Lows

According to the NAHB Index, homebuilder confidence hit 90 in November, a record high for the index. This comes on the heels of October’s record high reading. The index plummeted all the way to 30 in April, so in just seven months, it has more than tripled. And that 90 level blows away the pre-2020 record of 78 in December 1998.

Mortgage rates, on the other hand, are setting record lows. In fact, they just set their 15^th record low of 2020. With the Fed expected to keep its benchmark short-term interest rate near zero until at least 2023, it’s possible – even likely – that the average 30-year mortgage rate could stay below 3% for 2+ years.

Unsurprisingly, median home sales prices continue to set record-highs. In addition to high homebuilder confidence and low mortgage rates, supply is constrained.

On its last earnings call, BZH noted, “By historical standards, we've built far fewer new homes in the last decade than population growth, household formation or job growth would have predicted.”

A lot of young people were moving to cities over the past decade, leading to lower demand for housing over that period. That’s why far fewer new homes were being built. But now, with remote work becoming increasingly prevalent, young people are moving to the suburbs, leading to surging demand for housing. Supply has not yet been able to catch up – and might not for a while.

Beazer’s Latest Numbers Bode Well for the Future

In Q4 2020 (the period ending September 30, 2020), Beazer’s new home orders increased by nearly 40% to 2,009. The company noted it had “the highest fourth-quarter sales pace we've achieved in the last decade.”

Homebuilding revenue, however, decreased by 12% yoy to $679 million, largely due to a decrease in closings. Beazer attributed the dip to “the impact of the pandemic on order and construction timing.”

You’d prefer to see revenue increase during a housing boom, but the decrease is more due to the pandemic than any shortcoming on Beazer’s part. The new order growth shows that once the coronavirus vaccine is widely distributed – which should be sooner rather than later – Beazer will be able to start seeing sales growth.

The beauty with Beazer is that it doesn’t need to see any growth to represent an excellent value. Shares are currently trading at just over 8x forward earnings and .25 forward sales. With growth a strong possibility over the next 2+ years, Beazer looks like a bargain.

Making Progress on the Debt

One of the only negatives with Beazer is its high debt. It’s a company with a market cap of around $500 million, but debt of a little over $1 billion.

The good news is that Beazer is taking steps to reduce its debt load and there is no reason to believe that debt will cause any long-term issues for Beazer. The company’s cash flow is strong and it expects to “get total debt below $1 billion by the end of 2022 using only a portion of our future profits.”

Companies with P/E ratios under 10 usually have something wrong with them. But that doesn’t mean that you should necessarily pass on them. It just means that you need to determine if the problem is going to go away or stay around. In the case of Beazer, the problem is likely to go away soon, which means that it’s simply offering a chance to pick up shares at a discount.

How to Play Beazer

Beazer looks well-positioned to take advantage of the housing boom over the next couple of years – or more. The valuation looks attractive and the price action has been bullish for months.

As long as the uptrend remains in place, short-term weakness should be viewed as a potential buying opportunity.