Take Shelter From These Battered Housing Stocks

Standard Pacific

Is there any hope for Standard Pacific ? Shares of the California-based homebuilder are down more than 80% for the year, closing Monday at $4.36.

The company sells about 11,000 homes a year and operates in eight states. That said, Standard Pacific generated about 45% of its revenue in California during the most-recent quarter.

The company posted third-quarter results on Oct. 25. Standard Pacific lost $119.7 million, or $1.85 a share, including $223.5 million of impairment charges. Revenue also fell 19% year-over-year to $675.5 million as new-home deliveries fell 25% to 1,697 units.

The company had just $26.9 million of cash on its balance sheet at the end of the third quarter, compared with $2.03 billion of debt. $150 million of those bonds are coming due in October 2008. Management did have to renegotiate some loan covenants in recent months, but it expects to be able to pay back the principal on those bonds and maintain positive cash flow through 2008.

The company also cut its 4-cent quarterly dividend last month, which will save it about $11.6 million a year. Still, some of Standard Pacific's longer-maturity bonds are trading at just 70 cents to 75 cents on the dollar, reflecting the heightened default risk.

The shorts are also circling the stock like a hawk stalking its prey. As of the latest monthly data, some 31 million shares (43% of the float) were being sold short. Still, we expect the company will be able to stave off its creditors for the next few quarters, even if the unwinding of some of Standard Pacific's 40 to 50 joint ventures has created new capital requirements.

But ultimately, we believe the writing is on the wall, and that given Standard Pacific's exposure to California and Florida, the company will be one of the first publicly traded homebuilders to declare bankruptcy. This impending collapse is the reason that private equity and its peers have not attempted to buy out Standard Pacific.

Beazer Homes

Beazer Homes is one of the smallest homebuilders based on market cap that we have profiled thus far. The homebuilder operates in 22 states and sold 18,669 homes at an average price of $286,700 in fiscal 2006.

The company has come a long way from just a few months ago when bankruptcy rumors surfaced after management announced it will delay its quarterly filings, and the Securities and Exchange Commission launched an investigation into its accounting records. Also, the company launched its own investigation into its mortgage unit in relation to its down-payment-assistance programs.

Looking at the recent quarter, for which the company has only provided preliminary results due to its audit investigation, Beazer expects to take $230 million of land charges, or roughly $3.70 a share. Its cancellation rate topped 68%, which was higher than last quarter's 36% and steeper than any of the homebuilders that we profiled.

Backlog declined 50% from the previous quarter, and the company had more than $460 million in cash -- much more than its original projection of $300 million. Also, the company announced the suspension of its dividend and cut its workforce by 25%, which is expected to yield $46 million in annual cost savings.

Based on today's reaction to the stock price -- BZH is trading slightly higher -- investors are taking the dividend suspension as a positive. But despite today's move, the stock is still down more than 80% on the year -- much wider losses than most of its peers.

The selloff has created interest in some hedge funds, as Moore Capital Management took a 5.1% stake in the company back in July, and Tontine Partners disclosed that it owns 9.4% recently. These buys, while encouraging, have not convinced us that Beazer's stock is near a bottom.

For one thing, Beazer does not have strong financials compared to its peers, even after the latest round of initiatives. Also, while government investigations often provide great buying opportunities -- as we saw with many tech stocks during the option-backdating scandals -- Beazer's core business may not regain its footing until 2009 or 2010.

With the current risks in the marketplace coupled with internal problems mentioned above, Beazer will have a tough time outperforming its peers over the next 12 months.