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Earnings Preview: Shares of Home Solutions of America, Inc. (NASDAQ: HSOA), a provider of recovery, restoration and rebuilding/remodeling services to commercial and residential areas, rallied strongly last week, ahead of releasing its second quarter results for the period ended June 30, 2007 on Wednesday before the market opens. Respected Rodman & Renshaw Senior Industrial Services analyst Joe Giamichael initiated coverage of the company last week with a "Market Outperform," the firm highest rating (54% of stocks under coverage carry such a rating) noting that HSOA "provides a compelling long term investment opportunity." Interestingly, he initiated coverage prior to second quarter earnings, and did so despite having Q2 estimates significantly below the other analyst following the company, suggesting a high degree of confidence in the company achieving the near-term catalysts he outlined in his report. His revenue and EPS estimates of $44.2 million and $0.12, which we believe are extremely conservative and we will discuss below, bring the quarterly consensus estimates down to revenue of $46.25 million and EPS of $0.14, making it easier for the company to exceed analyst estimates. The company's guidance was for Q2 revenue of $44-48 million and EPS of 14-17 cents. In his report, which contains a price target of $9, Giamichael noted several near-term catalysts including "A/R Collection, potential resolution of shareholder's lawsuit and a potential strategic partnership with a credible developer would improve the balance sheet and should lead to multiple expansion." There is no banking relationship between the companies. The other firm who covers HSOA, Sanders Morris Harris (SMH), in a savvy call, downgraded Shaw Group (NYSE: SGR), another construction services company, just days before the company said it would restate 2006 results, The stock declined 10% as a result of the news. However, SMH has maintained its Buy rating on shares of HSOA into earnings. So what do we expect from the company? Q2 should represent the first quarter that the company starts to look like a more traditional construction services company, reflecting a transition that began at the start of the year. Construction services should represent a more predictable and stable revenue base than the recovery business, albeit with lower margins, making it a bit easier to forecast. If one takes the backlog HSOA announced at Q1 of $112 million for FY'07 and divides it by three quarters, it would equate to approximately $38 million in revenue per quarter, excluding any new unannounced work that was completed in Q2. In mid-May, HSOA announced $11 million in new contracts which was not included in the '07 backlog. If those burn ratably, it would add nearly $2 million in Q2 revenue. We also know from the New Orleans-based Daily Journal of Commerce, a publication that covers the construction industry, that the company won projects in Q2 after the time it provided its backlog which were not announced, so that could add incremental Q2 revenue. In addition, although the company said it did not expect any revenue from either the Tampa or New York projects until the second half of the year, it said at its Annual Shareholder's Meeting in June that engineering work had already begun at the Tampa project and that Blue Diamond, had already begun construction on the New York project, so we believe it should be able to recognize some revenue from these two projects in Q2. We would expect interior services, which includes business with Home Depot and Centex, to be weak and below the $8.6 million from Q1, due to seasonal factors which boost business with Centex in HSOA's first quarter, as well as multiple warnings from Centex and cautious comments from Depot. We believe that as the company's construction services business continues to grow, the importance of the Depot and Centex relationships will continue to decline, causing weakness in the housing market to become less relevant. As a result of greater predictability in construction services revenue and strength in that business, we believe HSOA could meet the bottom of its revenue guidance without any revenue from interior services . Strong top-line growth should result in an excellent EPS profile, even if EBITDA margins are reduced as the Street expects. The impact of the August 2nd decision by the 5th U.S. Circuit Court of Appeals, which vacated a November ruling by a U.S. District Judge that opened the door for insurance companies to be held liable for flood damage that policyholders claimed was caused by negligent design, construction and maintenance of the levees in New Orleans, should be a non-event for HSOA, as most of their insurance work in the area comes from wind, not flood damage. (and as posted)****However, what will certainly impact its business going forward is what the company says about progress on the two $100 million contracts it previously announced to provide construction services for projects in New York and Tampa. The stock traded as high as $8.24 after those contracts were announced. With 44% of the float short and the company trading at just 11 times trailing 12-month earnings, an in-line or better earnings report could send shares higher. Note that shares jumped more than 8% after the company reported Q1 results. Shares ended the week at $5.40, up 90 cents.
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