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Why Shares of Hovnanian Enterprises Inc. Declined Today

By Timothy Green – Jun 9, 2015 at 3:28PM

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Disappointing earnings and declining profitability send the shares tumbling.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of homebuilder Hovnanian Enterprises (HOV 0.17%) slumped on Tuesday after the company missed analyst estimates across the board when it reported its fiscal-second-quarter earnings. The stock was down about 9% at 2:30 Tuesday afternoon, having recovered a bit after being down as much as 14% earlier in the day.

So what: Hovnanian reported quarterly revenue of $468.9 million, a 4.2% year-over-year increase, but far short of analyst expectations. The average analyst estimate for revenue was about $534 million. Home deliveries for the quarter were down 1% compared to the same period last year, although the company's backlog grew strongly, with its value jumping 11.9% year-over-year.

Hovnanian reported a net loss of $0.13 per share, nearly triple the $0.05 net loss per share reported during the same period last year and eight cents short of analyst estimates. Homebuilding gross margin declined while SG&A expenses as a percentage of revenue rose during the quarter, leading to the disappointing profitability. CEO Ara Hovnanian expects the gross margin to recover in the coming quarters.

Now what: Hovnanian expects strong profitability in the fourth quarter, but not enough to offset losses in the previous three quarters. 2016 is expected to be a breakout year, according to the CEO, with record revenue, deliveries, and profitability.

Hovnanian's profitability has been erratic in the past, so investors should take proclamations about a great 2016 with a grain of salt. Analysts are expecting EPS of $0.35 in fiscal 2016, which puts the stock price at just about eight times forward earnings, but with disappointing performance so far in 2015, there's no guarantee that these estimates turn out to be anywhere close to reality.

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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