Macro Tsimmis

intelligently hedged investment

Beazer Homes (BZH) update #8

Posted by intelledgement on Tue, 06 May 08

Is it Beazer Homes (BZH) or “Lazarus” Homes?

We are short BZH shares, and thus were neither surprised nor disappointed when the company announced after the close today that they had received a notice of potential default from the Bank of New York with respect to a $103 million tranche of unsecured notes due in 2036. However, upon a closer examination, we conclude that while there are lots of reasons to believe that the remarkable rise of BZH stock from the dead—today’s $12.10 close was a new 2008 closing high and the stock is now up a breathtaking 63%(!!) since the end of 2007—is doomed to turn around precipitously, this particular problem is not one of them. If the imminent release of the company’s overdue quarterly reports—they are restating results to correct the illicit accounting practices of previous management—doesn’t cure the alleged loan covenant violations per se, then no doubt a negotiated settlement will be forthcoming.

We are hopeful that the spate of quarterly results from BZH and other home builders will shed some light on their warts, which the market seems to have totally lost sight of. (Beazer leads the pack, but most of the other builders are also up sharply so far this year.) Fortunately, we waited months for the price to rise to $10.99 before we shorted BZH—for the second time—so we are only down 10% on this play here. (And considering that the first time we shorted BZH last year, we had a 48% profit, overall, we can still claim victory.)

On the other hand, if—contrary to our expectations—the housing sector stablizes here and Beazer’s results are better than expected, we will have to consider the possibility that the economy could dodge the recession bullet yet again. And in that case we will need to reconsider our short position here (and also with Wachovia)…although even if the real estate market were to recover, Beazer would still have serious company-specific issues: namely, the ongoing SEC and Justice Department criminal probes.

We should know more presently (when the results are announced). Stay tuned.

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