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Hovnanian (HOV) Looks A Good Buy

Sep. 08, 2015 12:00 AM ETHOV
Michael Bryant profile picture
Michael Bryant's Blog
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It is not easy to predict earnings for a company. I showed one method in my Lowe's article. I will look at one company reporting this week that I think have a good chance of beating analysts' estimates. Scanning the list of major companies reporting earnings between September 7 and September 11, I found Hovnanian Enterprises (HOV) had a large decrease in expected earnings year over year that looked odd from my general knowledge about the company.

Hovnanian Enterprises is one of the nation's largest homebuilders with single-family homebuilding operations in 201 communities in 34 markets. The map below from the company's latest 10-K shows the location of active selling and proposed communities.

Source

The company also provides financial services such as buying and selling mortgages as well as offering title insurance services. Thus, I would think one of the largest homebuilders in a slowly improving housing market would benefit from the rising tide.

Below is a snapshot of the company's 4th quarter 2014 income. Notice rising revenue, net income, and income per share. The only big concern may be the company's large debt.

Source

And the graph below shows that net income (blue line) and earnings per share (orange line) has been rising since 2011.

Source

Looking at cyclical quarterly revenue data (all numbers in thousands), I assume that the 1st quarter is the worst quarter of the year, and the 4th quarter is the best quarter in the year. Thus, when the company reports 3rd quarter earnings Wednesday September 9 before the bell, we can expect it to be an improvement from 2nd quarter.

Source

Analysts estimate the company will earn $0.01 per share on $611.95 million in revenue. This compares to $0.11 per share on $511.01 million a year ago. Thus earnings are expected to be down by 10 cents, but revenue is up about $100 million year over year. Does this sound reasonable?

After it reported 2nd quarter earnings, shares fell more than 13% on weaker-than-expected results. It reported -$0.13 per share, compared to -$0.05 per share year-ago, on $468.9 million in revenue, up from $449.9 million a year ago. However, analysts were expecting -$0.05 per share on revenue of $532 million.

Thus, revenue is expected to rise about $143 million from 2nd quarter, and earnings are expected to rise 14 cents. From the Management's Discussion section of the 2nd quarter 10-Q:

Based on the 2,972 homes in backlog with a dollar value of $1.2 billion at April 30, 2015 and the anticipated gross margin associated with this backlog, as well as our expected increases in community count, we believe that we are well-positioned for stronger results in the latter half of the fiscal year, primarily in the fourth quarter. However, we do not expect that anticipated fourth quarter fiscal 2015 pre-tax income will be sufficient enough to offset the pre-tax losses incurred in earlier quarterly periods of the fiscal year. Also, several challenges, such as economic weakness and uncertainty, uncertain oil prices and extreme weather conditions (both of which may affect our Texas markets), the restrictive mortgage lending environment and rising mortgage interest rates, could further impact the housing market and, consequently, our performance. Both national new home sales and our home sales remain below historical levels. We continue to believe that we are still in the early stages of the housing recovery. However, given our recent uneven operating performance, we may continue to experience mixed results in some of our operating markets.

From the bold-highlighted text above, it seems that management does not expect a fiscal profit for the year and a profit in the 3rd quarter. Using a similar calculation as in the Lowe's article, I however expect Hovnanian to barely beat on earnings and meet revenue estimates.

Analyst's Disclosure: I am/we are long HOV.

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