If there's anything good about a sectorwide funk, it's that you can take your pick of the litter. So even though I know there are folks who like broadly diversified Hovnanian (NYSE:HOV), if I were to buy a homebuilder stock today, it wouldn't be this one.
As the company preannounced not so long ago, this proved to be a challenging quarter. Sales were up about 30%, with homebuilding revenue up about 24% and the rest provided by higher land sales. Building margins declined, though, and pretax income and EBITDA were both below the previous year's levels.
Perhaps even more troubling were the numbers pertaining to future performance. Orders were down 19%, and the company reported a cancellation rate of 32% this quarter, versus 21% a year ago. Back-end-loaded guidance and rising buyer incentives are also valid reasons for caution.
Frankly, though, those aren't my major concerns, and those wouldn't be the reasons that I'd eschew Hovnanian for, perhaps, Toll Brothers (NYSE:TOL). Hovnanian has historically relied heavily on acquisitions and joint ventures for its growth, and that's a risk factor. So, too, is the company's above-average level of debt and off-balance-sheet transactions.
I'm also a little put off by some of management's comments. Company execs talk up return on equity, but they don't pay so much attention to return on capital. And while they seem to be blaming the media to some extent for talking about a housing bubble, I don't see how that invalidates the fact that new housing construction did get overheated and that speculators are now having trouble moving homes.
Three's no doubt that Hovnanian has been a strong performer over the full length of the recent housing cycle, and I suspect that a recovery in housing stocks would bring Hovnanian along for the ride. That said, I go with stocks where I feel most comfortable -- and today, that doesn't include this homebuilder.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
