Ben Mahaney, Editor

About the Author Ben Mahaney, Editor

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Zack’s Bear of the Day: Hovnanian

Estimates have fallen sharply for homebuilder Hovnanian Enterprises (NYSE:HOV) following its fourth quarter report on December 10. While the company beat expectations on the top-line, weaker-than-expected gross margins prompted analysts to revise their estimates significantly lower for both fiscal 2015 and 2016.

This sent the stock to a Zacks Rank #5 (Strong Sell).

With a highly leveraged balance sheet, declining margins and falling earnings estimates, investors should consider avoiding this stock near term.

Hovnanian Enterprises is a homebuilder with operations across the United States. Its homes are marketed and sold under the trade names K. Hovnanian Homes, Brighton Homes and Parkwood Builders. It is headquartered in Red Bank, New Jersey and has a market cap of $530 million.

Fourth Quarter Results

Hovnanian reported its fiscal 2014 fourth quarter results on December 10. While revenue of $698 million came in well above consensus, EPS was just in-line. This was due to lower-than-expected profit margins.

Its homebuilding gross profit margin fell from 22.6% to 19.3% of revenue. And its core operating margin declined 140 basis points over the same period to 9.8%.

Estimates Falling

Although Hovnanian’s Q4 EPS was in-line, analysts revised their estimates significantly lower for both 2015 and 2016. This sent the stock to a Zacks Rank of 5 (Strong Sell).

The 2015 Zacks Consensus Estimate is now $0.14, down from $0.35 before the report. The 2016 consensus fell from $0.64 to $0.39 over the same period.

Despite nearly record low interest rates and an improving labor market, housing starts remain well below their long-term average as homeownership rates continue to decline.

Valuation & Debt

Shares of Hovnanian are trading near their 52-week low, but it doesn’t look like much of a value here. The stock trades around 18x 12-month forward earnings, a premium to the industry median of 12x.

Hovnanian also carries a lot of debt. Its debt / total capital ratio is a whopping 129%, and its interest coverage ratio (operating income / interest expense) was just 1.14 in fiscal 2014.

The Bottom Line

With declining margins, falling earnings estimates and a still sluggish new housing market, the near-term outlook does not look bright for this homebuilder.

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