Hovnanian Enterprises, Inc. Earnings: Will the Homebuilder Grow?

Many fear a slowdown in housing. Will Hovnanian suffer from sluggish performance?

Mar 3, 2014 at 11:11PM

Hovnanian Enterprises (NYSE:HOV) will release its quarterly report on Wednesday, and investors have had mixed views about the homebuilder's future prospects. Although the company's stock soared late last year, concerns about unseasonably cold winter weather and a corresponding drop in home sales and starts have held back its shares so far in 2014, even as rivals D.R. Horton (NYSE:DRI), Toll Brothers (NYSE:TOL), and PulteGroup (NYSE:PHM) have played catch-up lately.

Hovnanian has had to navigate a tough environment in housing lately, as fears of rising interest rates and uncertainty about how far housing prices can climb before needing to take at least a temporary break have weighed on homebuilder sentiment. Yet investors still have high hopes for Hovnanian, with expectations that the company will become consistently profitable by next quarter and produce accelerating earnings growth. Let's take an early look at what's been happening with Hovnanian Enterprises over the past quarter and what we're likely to see in its report.

Hov

Stats on Hovnanian Enterprises

Analyst EPS Estimate

($0.03)

Year-Ago EPS

($0.08)

Revenue Estimate

$404.77 million

Change From Year-Ago Revenue

13%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

What's next for Hovnanian Enterprises?
In recent months, analysts have had mixed views on Hovnanian earnings, keeping January-quarter estimates steady, cutting 2014 fiscal-year estimates by $0.02 per share, but boosting fiscal 2015 projections by a nickel. The stock has jumped 25% since late November.

Hovnanian produced impressive results in its October quarter, helping set the stage for a strong share-price jump following its earnings release. Revenue soared almost 22%, as Hovnanian reversed a year-ago loss with earnings of $0.21 per share. Home deliveries rose almost 4%, to more than 1,800, and backlogs stand at almost 2,400 homes, encouraging CEO Ara Hovnanian that the homebuilder could have more pricing power to boost profitability in 2014.

Hovnanian's performance has been consistent with those of other homebuilders, including Toll Brothers' 57% jump in backlogs in its most recent quarter and Lennar's (NYSE:LEN) jump of 40% in dollar-value backlog. Yet the concern that many investors have is that after such a strong 2012 and 2013, Hovnanian, Toll, Lennar, and other peers like Pulte and D.R. Horton could have trouble keeping up the pace of their growth.

We've already started to see some signs of a potential slowdown appear in the housing market. Cancellation rates have been edging higher, as rising interest rates have made it harder for many would-be homebuyers to qualify for mortgage financing. Figures for purchase-money mortgage application volumes also support the idea that the mortgage market is on shaky ground, and that in turn could make it harder for Hovnanian and its rivals to sell homes.

Most recently, poor sentiment among homebuilders has caused a big slump in confidence about the housing market's future. The poor weather was one of the major factors for the drop in sentiment, but shortages of affordable land, high-quality employees, and readily available building materials have weighed on beliefs about the future of the industry. Given the huge share-price advances that Hovnanian, D.R. Horton, and other homebuilders have seen, anything short of solid growth will likely be a painful disappointment for shareholders.

In the Hovnanian earnings report, watch to see how well the homebuilder can buck the weather trend and keep its growth story intact. If Hovnanian falls short, it could mark a key moment for the housing industry on the whole.

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