Stock Picks: BZH Up, ERTS Down

Beazer Homes (BZH) reported a profit of 87 cents per diluted share for its fiscal fourth quarter after paying off debt early. Shares were up as much as 13% in midmorning trading following the better-than-expected results.

Of course, this earnings season has underscored the gap between “better than expected” and “good.” Beazer’s numbers were hardly stellar: quarterly revenue of $376.3 million, well below the previous year’s $649.8 million. Home closings for the quarter were down 24.3% over the previous year, though new orders saw a 2.4% uptick. Margins improved and the company reported a loss of $4.60 per share for the fiscal year, better than last year’s loss of $20.77 per share. Revenue, home closings and new orders for the fiscal year were all below 2008’s results. CEO Ian McCarthy said in a statement that the company sees “some moderation in negative market trends,” but the outlook remains uncertain.

Excluding the gain from paying down debt, Beazer’s results aren’t particularly impressive, says David Urani, an analyst at Wall Street Strategies. Revenue “looks decent” and there are some signs of stabilization, but the company is essentially performing in line with other home builders, Urani says. “People are real bearish on this stock so any bit of good news and the thing’s going to shoot up,” he says.

The broader housing market also got some good news. The Treasury Department this morning released a monthly update on its Making Home Affordable loan modification program, saying that the program has now reached more than 650,000 homeowners with trial modifications, about a fifth of those eligible, although data is not yet available on permanent modifications. Separately, the National Association of Realtors said this morning that existing home sales rose in most states in the third quarter, helped in part by the first-time home buyer tax credit, which has been extended through the first six months of next year, but 30% of the quarter’s transactions were distressed sales. “There are a lot of factors in the housing market to be really unsure about,” but Beazer should see gains as the market stabilizes, Urani says.

Bottom Line: Hold
A housing recovery should lift Beazer along with other home builders.

Traders weren’t impressed by Electronic Arts’ (ERTS) fiscal second-quarter earnings of six cents a share, or its acquisition of social games company Playfish Limited, announced after the market closed Monday. Shares of the videogame company were down more than 6% in midday trading after the company said it planned to cut about 1,500 workers to reduce costs.

Electronic Arts reported net revenue for the quarter of $1.147 billion, up 2% from the previous year. The company lowered its guidance for the fiscal year from $1.00 per share to a range of 70 cents to $1.00.

The acquisition of Playfish represents a move to expand into the growing market of social-networking gaming, but analysts say Electronic Arts overpaid for the company, with a deal for $275 million in cash, $25 million in equity retention arrangements and up to another $100 million if performance benchmarks are met. “I think they paid a lot of money for a company in an industry where there are essentially very low barriers to entry because the development costs for these games are quite de minimis,” says Eric Handler, an analyst with MKM Partners.

Weak sales of the company’s “Madden” games had already lowered expectations for the company’s results this quarter. Electronic Arts also signaled weakness in sales of games for the Nintendo Wii system, “even more weakness than I expected,” says Arvind Bhatia, an analyst with Sterne, Agee & Leach.

Looking ahead, the company doesn’t have a hit game ready for the crucial holiday season, when cautious retailers will likely focus on sure sellers, Handler says. “They’ve got some interesting games for the March quarter,” but with other companies planning post-holiday releases as well, it’ll be an unusually competitive quarter, Handler says.

Bottom Line: Hold
The post-holiday quarter will be a key opportunity for the company to prove it can deliver some hit games again.