Billionaires Clash Over Home-Building Company

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Years ago I saw a Western film, “The Spoilers,” in which John Wayne and Randolph Scott got into an awesome fight.


Now, some 20 years later, there’s another awesome clash, this one on Wall Street, between King Kong and Godzilla. That’s how one hedge fund manager characterizes the fight under way between two of the city’s shrewdest, wealthiest, and most highly regarded investment figures – corporate takeover artist Carl Icahn and Neuberger & Berman portfolio manager Marvin Schwartz.


The battle centers around the shares of Atlanta-based Beazer Homes ($108.31), one of the country’s largest builders of single family middle-class homes, which posted sales last year of nearly $3.2 billion.


The two adversaries have made major bets on the stock. Mr. Schwartz is long (meaning he owns the shares), while Mr. Icahn is short the stock (a bet its price will fall).


The extent of their holdings could not be immediately determined, but it’s understood Mr. Icahn is taking a beating on his stake, what with Beazer’s stock having shot up from a 52-week low of $81.38 to slightly below its year’s high of $112.99.


As money managers go, Mr. Schwartz is a mystery man to most investors. Publicity-shy and highly successful, he’s said to be a multibillionaire in his own right and personally own roughly $80 million worth of Beazer stock.


Mr. Schwartz declined comment, but sources who know him tell me his enthusiasm for the shares reflects among other things:


* Beazer’s puny P/E multiple (7.05), which is one of the lowest on the New York Stock Exchange.


* His expectations for solid earnings growth, with management predicting $16.50-$16.75 a share for the current September 30 fiscal year, up from $12.78 a year earlier, and a Street consensus forecast calling for $18 a share next year. (Meanwhile, its most recent quarterly numbers show Beazer is on a roll, with the company beating Wall Street projections by posting an imposing 46% earnings gain on a 30% sales hike.)


* Beazer sports one of the lowest ratios of market price to book value ($87 a share, as of this coming September 30) among publicly owned housing companies.


* Beazer has a substantial raw land inventory valued at more than $1 bil lion, based on its cost, and another $1 billion under option, providing it with the prospects of huge unrealized land appreciation.


* Are bound in employment, though slow.


* A likely wave of industry consolidations, given the need of home builder’s to cut costs and acquire other players in the field to increase market share. In this context, Mr. Schwartz is said to view Beazer as a prime takeover candidate.


Significantly, Mr. Icahn, who has an estimated net worth of $7.6 billion and could not be reached for comment, is far from being alone in having a negative view of Beazer. All told, the market’s overall short position in the stock stands at 4 million shares, more than a third of the company’s 13.5 million shares outstanding.


The battle between the two men comes at a time when home builders – even though a number are selling close to their 52-week high – have come under a cloud, largely reflecting a trend toward higher interest rates. One of 2003’s hottest market sectors with a whopping 97.2% gain, home builders have eased this year, though they’ve still managed to post an increase in 2004’s down market, rising 6.9% through August 31.


Being on opposite sides of the real estate fence is not new for our investment duo. A number of years ago, Mr. Schwartz purchased Mr. Icahn’s house in Bedford, one of the priciest areas in northern Westchester. Mr. Schwartz is a clear winner on that deal, what with housing prices in Bedford rising an estimated 40% to 70% in recent years. One real estate source estimates Mr. Schwartz could probably realize a profit of about three times his purchase price if he decided to sell the home.


Which of our investment warriors will win is anyone’s guess, but if you can believe Morgan Stanley, Mr. Schwartz is in for rough going. In a recent commentary dubbed “Housing Market Hangover,” Morgan Stanley argues that home price appreciation appears unsustainable. The benefit of lower rates, it believes, has largely run its course. As such, it expects marginal housing demand to shrink by 20%, implying a deterioration in home price increases from an 8%-9% pace in 2003-2004 to something closer to 2% in 2005 and 2006.


On the other hand, one money manager who knows both men quite well tells me: “I know nothing about Beazer, but if I had to bet money on who’s right, I’d put it on Mr. Schwartz because of his thorough and demanding research, versus Mr. Icahn who will often short a stock based solely on valuation and emotion, which is a faulty short strategy.”


The New York Sun

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