Hovnanian (HOV) ended up having killer numbers, sort of….their numbers got killed. If this is the bottom for the homebuilders, well you better look at the guidance for 2007 and do some forward multiple projections. The one caveat here as it is with so many industries is that the Heads of the homebuilders might not be able to see the clear skies beyond the horizon like economists and market predictors looking at radar. But someone is wrong, and HOV shares fell 5% after this earnings report because of guidance.
HOV reported a loss for the quarter after taking $315 million in inventory impairment charges in the fourth quarter alone (a huge portion of the $336M the whole year). Backlog is down, units under contract are lower. The company is forecasting 16,000 to 18,000 net home deliveries in 2007, but that includes 1,000 to 1,500 from joint ventures. This compares to a number of 17,940 for 2006 after a 2,261 inclusion from joint ventures.
Here is another killer: HOV is forecasting 2007 EPS at $1.50 to $2.00. You don’t need to worry that the street estimate for 2007 is $2.70 EPS and that the guidance is light. Homebuilders cant beat even lowered guidance now and we knew that. But what you need to worry about is that if you take the top of the range and back that into the closing share price of $35.00-ish you end up with a Forward P/E ratio of 17.5. Homebuilders have traded with a single digit P/E for a long time, and that is because when it is good it is so good that builders are thought of as genius successful businessmen and when it is bad builders are thought of as leper bankrupt losers with bad breath and even worse table manners.
The S&P has a P/E ratio of roughly 15.5 and the DJIA is roughly 15.4, and that is today. The forward targets are not really set from the street yet, but the street is still looking for earnings growth next year in the single digits. That means that this homebuilder is trading at a Premium multiple. If land values do not stabilize that much then the balance sheet projections get pretty weak too. All of this forward P/E and the like is assuming the company wasn’t lumping in a bunch of odd items, but if they try to say it will be due to one-time write downs then you better be a skeptic. Ask anyone who went through the 1980’s in Texas and they’ll tell you how those writedowns can keep happening quarter after quarter and year after year.
So now comes the trading game. Just how bad is the street really prepared for the sector downturn? Was this fully known and do you keep buying pullbacks in the sector? The stock closed down at $35.25, and fell to $33.50 in after-hours trading. The 52-week trading range is $24.79 to $54.59. We’ll see if the pundits that said the worst is behind in the sector are right or if the industry guys are right. One of them is way off.
Jon C. Ogg
December 18, 2006
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