Hovnanian Enterprises (HOV) - Hovnanian’s shares jumped 27% yesterday, and are up another 20% or so today, on signs that the turnaround is progressing. Third quarter revenues of $482 million increased 6% from a year ago and were modestly ahead of consensus. The company posted a loss of $7.6 million, or $1.27/share, much larger than the year-ago loss of $1.0 million, or $.18/share.
However, most relevant to the story is that the company is seeing healthy growth in its home-building pipeline. At the front of the pipeline: Hovnanian had a 12% increase in its community (neighborhoods) count. Community count is literally the raw material of growth: the builder acquires land on which to build houses. Next: it had a 10% increase in number of home-building contracts per community, showing more activity within each community.
The number of homes under contract to build increased 23% compared to a year ago, a strong indicator of near-term growth. In August, following quarter-end, contracts grew at an even faster 38% pace. And, the backlog to build new homes grew 11% from a year ago. All this points to stronger revenues in coming quarters. Hovnanian is showing that it can recover from its financial squeeze of a few years ago, when it couldn’t acquire land for starting new communities. This strength is also encouraging given the somewhat lackluster overall housing market.
Profit margins on homebuilding were steady from a year ago, indicating that it’s pricing power net of incentives remains positive, and that it can control its construction costs.
The company guided to positive net income for the full-year as it expects its construction and new home delivery activity to remain strong in the fourth quarter.
Hovnanian’s debt remains very elevated, although its nearest major debt maturity is three years away. Near-term financial liquidity remains adequate.
The company is by no means out of the woods, and so it retains our “Speculative” notation. But, the quarter showed that it is making progress with its turnaround.
We retain our Buy (Speculative) rating with a $16 price target.
Disclosure Note: Accounts managed by an affiliate of the Publisher, and one or more employees of the Publisher, own HOV securities.