Beazer: A Small-Cap Gem

12/17/2014 7:00 am EST

Focus: STOCKS

Homebuilders are some of the most disliked investments in the market right now, and with good reason, as the housing market has had many recent stops and starts over the past few years, explains Bret Jensen, editor of Small-Cap Gems from Investors Alley.

However, I am getting more optimistic about the housing market in recent months. Mortgage rates are very low by historical standards. So, if you’re a value investor looking for a good stock at great price look no further.

Beazer Homes USA (BZH) is a top ten homebuilder by sales and has a market capitalization right now of just under $500 million. Its enterprise value is just over $1.8 billion. The company has been around for 35 years and has built some 170,000 homes since coming public in 1994.

Beazer is well-diversified builder with just over 140 active communities in over a dozen states. Most of its locations are in the Southeast and the West, which continue to see faster population growth than the nation as a whole.

Beazer posted an over $1.00 a share loss in FY2013 but is tracking towards a profit of 45 to 50 cents a share in FY2014 on approximately $1.4 billion in revenue. The consensus calls for the homebuilder to earn anywhere from a $1.00 to $1.80 a share in FY2015. I believe Beazer will come in towards the higher end of that wide range.

The company recently instituted a well thought out strategic plan to grow annual revenues to $2 billion annually over the next two to three years while improving profitability.

Beazer Homes has an improving balance sheet. The company has a solid amount of cash on hand and no significant debt maturities until 2016.

Beazer took significant losses during and immediately following the financial crisis, like most homebuilders. This has resulted in almost $480 million in tax loss deferrals.

As Beazer starts to increase profits, these deferrals will greatly boost reported earnings as Beazer actions this considerable tax benefit.

Obviously, Beazer’s earnings power will be affected by the strength of the overall housing market, the economy, and job growth, as well as the direction of interest rates and how successful it is executing against its strategic plan.

I believe Beazer can do anywhere between $3.00 to $4.00 a share of earnings by FY2017.

I think Beazer can hit the $24 a share level it sold for earlier in this year over the next six-to-nine months. Over a two-to-three year perspective, I think the shares can move as high as $40.

Beazer is one of about 20 stocks we’re putting into the Small-Cap Gems portfolio to generate high double and triple digit returns. This is the kind of wealth building stock you want in your own portfolio.

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