BZH [Archive]

**wu30** Thu Aug 02, 2007 2:40 pm

BZH
Dear Blast,

Can you share your thoughts about BZH. I saw it on Gurufocus.com. The share price dropped a lot in a half year. However, Bill Miller still hold it. Do you think it is a bargin stock and worth to buy?

Thank you!

wu30

**blast_investor** Thu Aug 02, 2007 7:22 pm

Hi wu30,

I don't like this home building stock. This BZH has 1.6 billion debt, which will put lots of burden on the firm going forward.

The leverage is bit too high for this homebuilding.

Home builders with no or little leverage would be better pick to own for the long run. BZH is not such pick.

**lzhang** Fri Aug 03, 2007 2:41 am

A quick look at its balance sheet

As of Q1 report, it had 218,841 cash, 5,641 Restricted cash, 66,093 Accounts receivable, 2,909,285 Owned inventory, 462,296 Consolidated inventory not owned (I do not understand what is the meaning of it), 10,337 Residential mortgage loans available-for-sale, 128,355 Investments in unconsolidated joint ventures, 110,864 Deferred tax assets, 25,936 PPE, 121,368 Goodwill, 132,008 Other assets, and 2,587,889 Total liabilities.

To calculate its liquidation value, we give 100% value on cash, 80% value on inventory, 50% on other inventory, 50% on mortgage loan for sale, 50% on joint ventures, 40% on PPE, 40% on other assets, 0% on goodwill, and we have

218841+5641+66093+2909285*.8+462296*.5+10337*.5+128355*.5+110864+25936*.4+132008*.4 = 3092538.6 minus 2587889, we have $505M, which is about the same as its current market cap.

But we can not find detailed balance sheet for Q2. On its website, it just listed `selected' balance sheet data, so we have to guess its current value. Its shareholders' equity drops from 1,603,135 to 1,480,276. If we subtract $123M from $505M, we have $382M liquidation value, or about $10/share.

So it would be great buy Wednesday @ $8/share, which is below its liquidation value per our estimation. Maybe not right now @ $13/share.

Gee! What an insane market for such huge price fluctuation in just 24 hours!

Anyway, it may not have liquidation crisis:
1) it has enough cash,
2) they do not have margin call problems as their bond holders can not demand redemption and all of the debts have pretty long maturities, which give them enough time to turn around. It might be good buy if it can go down to $8 level again...
3) they had positive CFO as of Q1. Ironically, since they could not expand the homebuilder business, they had very positive CFO as of Q1, which was more than enough to cover interests. It is expected that they are going to increase their cash balance to above $300M from current level of about $129M.

I think we need to wait until its Q2 report filing to see what is its current liquidation value. It is not quite clear right now if their liquidation value will diminish (the debts will not vanish anyway).

**lzhang** Fri Aug 03, 2007 5:00 am

Hi blast,

Do you know of any homebuilder companies with no or little debts? It should be great buy if it exists.

blast_investor wrote:

I don't like this home building stock. This BZH has 1.6 billion debt, which will put lots of burden on the firm going forward.

The leverage is bit too high for this homebuilding.

Home builders with no or little leverage would be better pick to own for the long run. BZH is not such pick.

**blast_investor** Fri Aug 03, 2007 4:32 pm

Hi lzhang,

very nice analysis on the BZH balance sheet.

No, I am not aware of any solid homebuilders there.

Homebuilders are earning rich, poor asset stock. I tend to favor asset rich stock in a down cycle business, unless the company is market leader with monopoly power.

**lzhang** Wed Aug 08, 2007 3:02 am

Hi,

It might end up with very nice returns to buy the debts of those companies. The debts are distressed already. The equity faces wipeout, but the debts, backed by the real estate assets, are very solid.

I do not know of any methods that individual investors can buy those debts.

**lzhang** Tue Aug 14, 2007 3:33 pm

BZH Update as of 08/10/2007
According to the latest press release and SEC filing, BZH could not file its June quarterly report on time. The reason, according to the filing, is that

Quote: its former Chief Accounting Officer may have caused reserves and other accrued liabilities, relating primarily to land development costs and costs to complete houses, to have been recorded in prior accounting periods in excess of amounts that would have been appropriate under generally accepted accounting principles. These reserves and other accrued liabilities, if reversed in subsequent accounting periods, could have been used to reduce the Company’s operating expenses by amounts that would not have been appropriate under generally accepted accounting principles.

Basically it says that the previous quarters were not that bad as previously stated, and the coming quarters, if the accounting problems are to be corrected, will not be as good as it is expected. So basically, the former Chief Accounting Officer was trying to manipulate the company's quarterly earnings, painting a rosy picture for the coming quarters.

If the financial reports are cooked, it is really hard for outsiders to find out what the liquidation value is for the company, even according to the latest filing, those accounting problems should not affect the company's balance sheet very much quantitatively. Are the assets real, or they have to be written off later on? Are the liabilities real, or they are used to offset future expenses?

The liquidation crisis is real now due to accounting problems, filing delays, etc., as those problems might have broken the bond covenants. At current situation, since the financial reports are no longer reliable, it is hard to determine its liquidation value. So our previous $10/share liquidation valuation might not be valid any longer.

FD and Disclaimer

The author has no position in BZH. The position can be changed without further notice.

This is not an investment recommendation to buy or sell any of the securities mentioned therein. All materials presented here are for information purposes only.

References

http://hepinvestor.blogspot.com/2007/08/bzh-update-as-of-08112007.html

http://www.sec.gov/Archives/edgar/data/915840/000118811207002457/t15237_nt10q.htm