Hovnanian Enterprises (HOV) shares have advanced sharply to over $25 today, from about $5.50 in early September and substantially higher than our $19.50 price target. The company’s turnaround appears on-track following its encouraging quarterly report on September 5, supported by continued strength in U.S. employment as well as low interest rates.
However, with the company’s very high financial leverage and elevated risk (warranting our Speculative rating), the shares remain essentially a call option on any improvement in its results and outlook. At about $25, HOV shares trade at about 6.3x our optimistic 2021 EBITDA estimate of $300 million. This appears fully-valued.
On different basis, the shares are trading at about 1x adjusted book value. This adjusted book value is somewhat generous, adding back $645 million to account for the value of their tax loss carryforwards and ignoring the value of their $140 million in preferred stock. Without these adjustments, HOV’s book value would be negative and thus meaningless. Even with these adjustments, the shares reflect a mostly-turned-around Hovnanian.
While the company’s shares remain below our initial price target and the price at our recommendation, the shares’ risks now outweigh the return potential, and we are moving our rating to SELL.