Beazer's downward spiral continues

Amid the worst housing sales slump in more than a decade, 2007 has been a particularly trying year for Atlanta-based Beazer Homes.

Its stock price has plunged to values less than half the size of its January levels.

Meantime, Beazer is facing lawsuits from its customers, employees and stockholders, federal inquiries into its mortgage lending and other corporate practices and the abrupt departures of three of its top executives, all since the first of the year.

Legal and housing experts expect Beazer's troubles to drag on well into 2008, but predict that the company will ultimately emerge intact though perhaps structurally altered.

Barry Ritholtz, president of Ritholtz Research and Analytics, said the recent acquisition of Beazer stock by the hedge fund Moore Capital Management indicates a confidence that the stock price, currently a value, will recover.

"My best guess is that they [Beazer] will survive this," Ritholz said. "But it's no more than a guess."

Ritholtz points out that the federal inquiries and the firings earlier this year of the company's chief counsel and chief accountant were prompted by allegations of questionable business practices. But none of the complaints against Beazer arose from financial deception, which would pose greater dangers to the company's long-term survival.

"As far as we know, their sales, their revenue and their profit were real," Ritholtz said. "This is an ethical situation."

Leslie Kratcoski, Beazer's vice president of investor relations and corporate communications, said an outside team is conducting a review of Beazer's business practices.

Other than news releases and required Securities and Exchange Commission filings the company has issued since the inquiries began, Kratcoski said Beazer has no new information to reveal about its legal and regulatory matters.

The thick of Beazer's turmoil began in March when a series of reports in the Charlotte Observer detailed foreclosure rates of more than 20 percent in Beazer communities near Charlotte, N.C. News of the inquiries and lawsuits soon followed.

Ken Jones, a real estate and corporate practice attorney with the Atlanta firm of Hall Booth Smith & Slover, agreed with Ritholtz's assessment of Beazer's current status.

"If there doesn't come a rash of homeowner lawsuits and [the federal probe] stays in the corporate governance area, I think they can survive," Jones said.

But he noted that a further shake-out of leadership at Beazer is likely as it works through the process and aftermath of the inquiry.

"There's probably going to have to be some sort of wholesale change on the board of directors," Jones said.

CEO's future

Similarly, the fate of Beazer CEO Ian McCarthy could be hanging in the balance, said attorney Jacob Frenkel, chairman of the securities enforcement and white collar crime practice at the Rockville, Md., firm Shulman Rogers Gandal Pordy and Ecker.

In situations like Beazer's, Frenkel said, boards of directors frequently move quickly, sometimes too quickly, to rid the company of anyone associated with suspect activities, even if they have done nothing wrong.

"Over the past five years, we've seen companies move out people who were in charge of areas that have come under scrutiny," Frenkel said. "Boards are often too quick to act."

But despite the recent departures of several of his top lieutenants, McCarthy continues to guide the company. The longer he continues, the greater the likelihood he will remain at its helm, according to Frenkel.

"It is too early to determine who is likely to survive, but it is a good indication that his leadership has been appropriate," Frenkel said.

Frenkel cautioned that the federal probe will not yield any charges or findings for a long time, possibly as much as 18 months, and that the fate of the lawsuits hangs on the probe's outcome.

"It's impossible to tell yet what will come of this," Frenkel said.

Meantime, the lawsuits will remain procedural "jockeying for position," according to Frenkel.

"There's a big explosion when the news [of a probe] hits. Then, it's wait and see," Frenkel said.

Stock swoon, suits

But the troubles have made investors wary. Beazer stock, which was trading at more than $46 per share at the beginning of the year, plunged to less than $23 per share after the company fired its chief accountant for attempting to shred documents in violation of Beazer policies.

On Thursday, Beazer's stock hit $20.73 per share.

Since the launch of a U.S. Housing and Urban Development inquiry into Beazer's mortgage lending practices in Charlotte, stockholders have filed lawsuits against Beazer over what they say is the company's failure to disclose its lending practices and high foreclosure rates in its communities.

Buyers are suing over the high foreclosure rates, which they claim have damaged their property values.

And participants in Beazer's own 401(k) plan are suing over the company's disclosure practices because a significant portion of the 401(k) funds are invested in company stock.

All of the suits are seeking class action status.

Takeover target?

Meantime, the falling stock price could make the company an attractive acquisition for a well-financed rival in an industry poised for consolidation. With strategic land holdings in attractive markets, Beazer's portfolio could become a strong lure with stock prices at attractive levels.

"Companies with depressed stock prices recognized by experts to have retained their intrinsic value certainly become takeover [targets]," said Frenkel.

But suitors are likely to wait until the housing market shows signs of recovery and the outcome of the probe is more clear, lest they inherit a company with extensive liabilities as well. And shareholders will wait nervously for earnings while the probe and lawsuits run their course.

Beazer officials will report quarterly earnings next Thursday. In their January report, they disclosed a quarterly loss of $59 million for the last three months of 2006.