BZH - Valens Credit Report - 2017 10 26
- Cash bond markets are materially understating credit risk with a cash bond YTW of 3.744% relative to an Intrinsic YTW of 5.824%, while CDS markets are understating credit risk with a CDS of 240bps relative to an Intrinsic CDS of 379bps. However, Moody's is accurately stating BZH's fundamental credit risk with their B3 credit rating, one notch lower than Valens' HY2 (B2) rating
- Incentives Dictate Behavior™ analysis highlights that management's compensation framework focuses them on all three value drivers, as well as debt reduction, which should lead to Uniform ROA expansion and increased cash flows available for servicing debt obligations. Furthermore, management members are material holders of BZH equity relative to their average annual compensation, indicating they are likely aligned with shareholders for long-term value creation. Moreover, management members have low change in control compensation, indicating they are not incentivized to seek a buyout or sale of the firm, limiting event risk - Earnings Call Forensics™ of the firm's Q3 2017 earnings call (8/1) highlights that management is confident about the sustainability of adjusted EBITDA growth and gross margin expansion, as well as the sustainability of recent pricing improvement
- BZH currently trades near historical highs relative to UAFRS-based (Uniform) Assets, with a 1.1x Uniform P/B. At these levels, the market is pricing in expectations for the firm to experience a dramatic operational turnaround, indicating that downside risk is likely elevated
Beazer Homes USA is engaged as a homebuilder. The company's homebuilding operations consist of the design, sale, and construction of single-family and multi-family homes. The company purchases land or obtains an option to purchase land, which, in either case, requires certain site improvements prior to home construction. When available in certain markets, the company also buys finished lots that are ready for home construction. The company has investments with land developers, other homebuilders and financial partners to acquire land positions, to manage its risk profile and to utilize its capital base. The company also acts as the general contractor for the construction of its new home communities.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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