Activating Over 60 New Communities Will Drive Future Opportunities

Key Takeaways

• Expanding new communities and innovative mortgage options drive top-line growth and higher margins through increased sales and personalized home offerings.
  
• Cost reduction and focus on Zero Energy Ready homes align with market conditions, enhancing profitability and supporting long-term growth.
  
• Delayed home closings and challenges in key markets may pressure Beazer Homes' revenue, margins, and profitability, with risks to achieving earnings guidance.

Catalysts

Operates as a homebuilder in the United States.

• Beazer Homes USA plans to activate over 60 new communities before year-end, driving top-line growth as new community openings boost sales activity and revenue.
  
• The company is enhancing its mortgage financing options for to-be-built homes, with innovations like one-way rate locks and permanent rate buydown, likely leading to improved sales and higher margins on personalized, higher-margin homes.
  
• Beazer is focusing on improving the profitability of its speculative homes by reducing build costs and aligning features with market conditions, which is expected to enhance net margins.
  
• Cost reduction initiatives are underway, including reducing the build costs by about $3,000 per home through focused SKU lists and rebidding labor and material providers, which should positively impact earnings.
  
• The company’s expansion in Zero Energy Ready homes, which comprised over 85% of sales in the recent quarter, aligns with consumer interest in energy efficiency, supporting long-term revenue growth and offering potential tax benefits that could improve net margins.

Beazer Homes USA Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Beazer Homes USA's revenue will grow by 12.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.0% today to 5.1% in 3 years time.
• Analysts expect earnings to reach $173.2 million (and earnings per share of $5.58) by about March 2028, up from $121.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.9x on those 2028 earnings, up from 5.4x today. This future PE is lower than the current PE for the US Consumer Durables industry at 10.2x.
• Analysts expect the number of shares outstanding to grow by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Beazer Homes USA Future Earnings Per Share Growth

Risks

• Beazer Homes experienced an uneven sales environment and had to defer the closing of nearly 50 homes in backlog, suggesting potential pressures on revenue and earnings.
  
• The company reported challenges in the Texas and Florida markets due to higher inventory levels, leading to sluggish sales and more aggressive incentives, which could impact net margins and earnings.
  
• Weak sales in the first quarter necessitated increased spending on sales incentives, possibly squeezing future net margins.
  
• Labor availability issues in Houston and meter availability in California resulted in delayed closings, affecting revenue timelines and potentially cash flows.
  
• With fiscal year guidance towards the lower end of sales pace and margin ranges, there is a risk to achieving higher profitability and earnings for the year.

Valuation

• The analysts have a consensus price target of $40.0 for Beazer Homes USA based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $37.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.4 billion, earnings will come to $173.2 million, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 11.4%.
• Given the current share price of $21.7, the analyst price target of $40.0 is 45.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.