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Hovnanian Enterprises Inc. (NYSE: HOV)

Hovnanian Enterprises Inc. (HOV) is one of the nation’s largest homebuilders, designing, constructing, marketing and selling single-family detached homes, attached townhomes and condominiums, mid-rise and high-rise condominiums, urban infill and active adult homes. The Company has operations in Arizona, California, Delaware, Florida, Georgia, Illinois, Kentucky, Maryland, Minnesota, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas, Virginia and West Virginia.

HOV’s homes are marketed and sold under the trade names K. Hovnanian(®) Homes(®), Matzel & Mumford, Brighton Homes, Parkwood Builders, Town & Country Homes, Oster Homes, First Home Builders of Florida and CraftBuilt Homes. The Company had 6,212 home deliveries, excluding joint venture, for the trailing 12 months ended July 31, 2009. Total revenues for this period were $1.9 billion.

Incorporated in 1967, HOV is headquartered in Red Bank, New Jersey.

Source: Reuters.com, SEC Filings, FY ending October

Financial Summary

HOV posted total revenues of $387.1 million for the three months ended July 31, 2009, versus $716.5 million in the third quarter of the prior year. For the first nine months of fiscal 2009, total revenues were $1.2 billion compared with $2.6 billion for the nine month period in the previous year. “The trend of improved contracts per active selling community continued for the third consecutive quarter, with the most significant year-over-year increase of 62% occurring in our third quarter,” Ara K. Hovnanian, HOV president and CEO, said in a statement.

The Company had an after-tax net loss of $168.9 million, or $2.16 per common share, for the third quarter of fiscal 2009, down 17% from the year-ago quarter’s net loss of $202.5 million, or $2.67 per common share. For the first nine months of fiscal 2009, the after-tax net loss was $465.9 million, or $5.96 per common share, compared with a net loss of $674.1 million, or $9.98 per common share, in the same period in the prior year.

During the third quarter of fiscal 2009, the Company reduced its debt by approximately $119.2 million through cash tender offers for its unsecured senior and senior subordinated notes for which the Company expended approximately $80.5 million. As a result, it recorded a $37.0 million gain on extinguishment of debt net of costs.

At July 31, 2009, homebuilding cash totaled $545.6 million and the balance on the revolving credit facility was zero. Excluding approximately $80.5 million expended on the tender offers and $100.0 million to pay down the balance on the revolving credit facility, HOV’s third-quarter 2009 cash flow was negative $48.5 million.

Analyst Consensus

Source: Reuters.com

Analysts rate shares of HOV an “Underperform.” This is the consensus forecast amongst 9 polled investment analysts.

Source: http://markets.ft.com/tearsheets/analysis.asp?s=HOV

Investment Highlights

Overview

HOV has established itself as the sixth largest homebuilder in the United States. As of October 31, 2008, the Company has delivered in excess of 280,000 homes, including 11,281 homes. The Company has a diversified mix of housing products including entry-level, move-up and luxury homes, as well as attached townhomes, mid-rise and high-rise condos and active-adult communities. It boasts of 198 active selling communities in 18 states. The Company’s strategy is to achieve powers of scale and market concentration by establishing a large presence in each of its markets.

HOV markets and sells its homes under the trade names K. Hovnanian(®) Homes(®), Matzel & Mumford, Brighton Homes, Parkwood Builders, Town & Country Homes, Oster Homes, First Home Builders of Florida and CraftBuilt Homes. As the developer of K. Hovnanian’s(®) Four Seasons communities, the Company is also one of the nation’s largest builders of active adult homes.

HOV saw continued improvement in sales pace despite downbeat macroeconomic data. For the third quarter, the Company reported a year-over-year increase of 62% in contracts per active selling community. According to CEO Ara Hovnanian, “contract cancellation rate during the third quarter was 23%, which is back to more normalized levels and implies that homebuyers entering contracts today are more realistic about the current housing situation.”

In addition, Hovnanian stated that “home ownership affordability continues to be very appealing, particularly for entry-level buyers, which comprised 37% of the applications HOV’s mortgage company received during the third quarter.” Hovnanian stated that the recent data from the S&P/Case-Shiller Index and the National Association of Realtors suggests that stabilizing trends are emerging in the price for existing homes.

HOV also focuses on maximizing liquidity and reducing debt levels. According to CFO J. Larry Sorsby, the Company successfully reduced debt by an additional $119 million during the third quarter through debt tender offers. At July 31, 2009, HOV’s cash position was $545.6 million, reflecting the $81 million used for the debt tender offers and $100 million used to pay off the balance on the Company’s revolving credit facility, according to Sorsby.

“Since the beginning of our fiscal year, we have reduced our outstanding debt and future annual interest payments by approximately $740 million and $50 million, respectively. We further reduced our near-term maturities through these recent actions and now have only $11 million in face value that comes due in January 2010, with another $113 million that matures in April 2012,” Sorsby said in a statement.

As of July 31, the Company’s net debt has reportedly accounted for 109% of total capital. This compares to an average of 26% for the dozen major homebuilders tracked by research firm Zelman & Associates.

On October 20, HOV announced the closing of $785 million senior secured notes offering, as well as the expiration and final results of cash tender offers and related consent solicitations for its senior secured and unsecured notes. Early this month, HOV announced its plan to sell up to $775 million of seven-year notes in order to fund its previously reported tender offer for up to $759.3 million in debt.

Market Outlook

The housing market continues to be challenging for HOV and the rest of the nation’s homebuilders. Market observers expressed concern on declining homebuilder confidence as the government’s homebuyer tax credit approaches expiration next month coupled with gloomy housing data. The National Association of Home Builders recently said its housing market index slipped one point to 18 in October, its first decline since June. Housing construction data was also a disappointment after missing expectations last month. According to the Commerce Department report, housing starts were up 0.5% during the month to a seasonally adjusted rate of 590,000 units, falling short of economists’ expectations of 610,000 units.

Looking to recovery in its homebuilding markets, Hovnanian said the Company remains steadfast in its approach to take the necessary steps to manage through this downturn and ensure the best possible position for the Company.

Source: HOV Q3 2009 Report

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

As of last close on October 20, 2009, HOV closed at $3.76, 34.61% below its 52-week high of $5.75, set on September 01, 2009.

Moving Average

HOV is trading below its 13-day moving average. However, this moving average is trending higher which suggests that there has been buying interest in this stock.

MACD

The MACD for HOV currently indicates a strong bearish signal for two reasons. First, the MACD is below the signal line, a 9-day moving average. Second, the MACD is below the critical level of 0, which implies that the underlying moving averages are trending lower.

Bollinger Bands

HOV has been relatively stable recently. This is evidenced by the width of its Bollinger Bands, which are tighter than normal. Additionally, HOV is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

Source: http://www.scottrade.com

Comparative Analysis

HOV has a negative Return on Assets of -28.70%, compared with an industry average of -0.07%; and Return on Investment of -34.19%, compared with an industry average of 0.04%; and a Return on Equity of -455.05%, compared with an industry average of -0.08%.

Source: Yahoo! Finance, Analyst Estimates.

Insider Trading Activity

NET SHARE PURCHASE ACTIVITY

Data provided by Thomson Financial

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