At a recent Bank of America analyst conference, Hovnanian Enterprises (NYSE: HOV) CEO Ara Hovnanian made some rather bearish comments about his homebuilding company and its industry. I found his comments somewhat comforting.
After all, if a CEO gives it to you like it is, then you know you're dealing with a straight shooter. And that's exactly the type of CEO that a company in a relatively sharp industry slump needs.
Company snapshot
Hovnanian, which Ara's father founded almost 50 years ago, is the sixth largest U.S. homebuilder. It competes with the likes of Lennar (NYSE: LEN) and Beazer (NYSE: BZH). The company produces a wide spectrum of homes, but 75% of is business is in single-family detached homes. Hovnanian also does some condos, townhouses, mid- and high-rise units, adult housing, and urban infill and revitalization.
The company's most important markets -- including California, Florida, and the D.C. area -- have been some of the hardest-hit in the housing industry's downturn.
Betting on management
It's truly hard not to like the way Ara Hovnanian speaks about his company, especially given that his family owns roughly 40% of it. The CEO clearly doesn't believe in sugar-coating things -- he revealed that Multiple Listing Service (MLS) trends are mostly negative, the Florida markets are extremely difficult, and the land impairments Hovnanian has had to take are very painful.
However, he also mentioned that he's been through many housing cycles and is confident that he can steer the ship through turbulent times and then maintain the upside potential once the cycle turns. In the meantime, he sees a silver lining in that Florida is land-constrained on the coast, meaning that margins could swing to the upside if the cycle turns. He also noted that even though homebuyers are hesitant -- possibly because of negative newspaper headlines, the subprime scare, and other psychological effects -- the economy is still strong, interest rates remain relatively low, and the company is still getting an ample amount of foot traffic, an indication that buyers might need just need a little more confidence to help stop the decline.
The CEO also said that he and his family are extremely focused on building Hovnanian into a great company, and he strongly asserted that he isn't looking for easy outs or short-term gains.
A homebuilder to buy?
Hovnanian's market cap of $1.2 billion currently trades at a roughly 30% discount to its book value of $1.75 billion, excluding intangibles. The company seems to have strong leadership with plenty of experience, and the worst may be over after the $336 million in inventory impairments it took last year. All things considered, these shares could be trading at a tempting discount to fair value.
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates hearing your comments, concerns, and complaints. Bank of America is an Income Investor recommendation. The Motley Fool has a disclosure policy.
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