BZH- Valens Credit Report - 2019 04 17
- CDS markets are materially understating BZH's credit risk with a CDS of 394bps relative to an Intrinsic CDS of 644bps, while cash bond markets are understating credit risk with a YTW of 7.763% relative to an Intrinsic YTW of 8.853%. However, Moody's is materially overstating BZH's fundamental credit risk, with their highly speculative B3 credit rating six notches lower than Valens' XO (Baa3) rating- Incentives Dictate Behaviorâ„¢ analysis highlights positive signals for creditors. 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. Additionally, management members have low change-in-control compensation, indicating they are not highly incentivized to seek a buyout or sale of the firm, decreasing potential event risk
- Earnings Call Forensicsâ„¢ of the firm's Q1 2019 earnings call (2/4) highlights that management is confident in their pre-engineered structural plan options and balanced growth strategy execution. In addition, they are confident in lateJanuary macro housing trends improvement. However, management may lack confidence in their ability to maintain margins and achieve community count expectations, and may be concerned about their ability to execute their capital allocation plan. Moreover, they may be exaggerating their transparent mortgage and energy efficiency competitive advantages, and may be downplaying concerns about the soft rate environment in fall, particularly among short-term ready to close homes
- BZH currently trades near recent lows relative to UAFRS-based (Uniform) Earnings, with a 11.4x Uniform P/E. At these levels, the market is pricing in expectations for Uniform ROA to decline from 11% in 2018 to 9% in 2023, accompanied by immaterial Uniform Asset shrinkage going forward
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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