Hovnanian Enterprises (HOV, Financial) is getting better on the back of recent rebound in the housing market and economic conditions in the United States. Looking ahead, the company should benefit from the recovery in the housing market, which is in the early stages currently. Also, the increase in deliveries and average sells price driven by product mix changes should enhance its performance this fiscal year.
Better times ahead
In addition, the company should benefit from increase in sales of homes and improving economic conditions in the United States. According to a report the housing market is on its way back to attaining its historical levels seen in 2006.
In another report, NAR chief economist Lawrence Yun said, although the existing home sales rose above 9% to 5.1 million in 2013, sales activities economized during the trailing six months. He further added saying that there could be steady enhancements moving forward. He expects the sales activities to decline 3% for calendar year 2014 to over 4.9 million, but expect it to move up more than 5.2 million in calendar year 2015.
These positive trends in the market should assist Hovnanian to sell its homes to its customers across the region, including the first-time buyers and move-up buyers. The homebuilder received two contracts per community in the month of November 2014 as compared to 1.8 contracts in the same period last year. Also, Hovnanian is increasing its community count. Its communities count increased to 201 from 192 communities it had over 2013. Moreover, the company opened about 98 new communities and closed 89 communities.
What it plans to do
For fiscal 2015, the company plans to open additional communities. Though it hasn’t revealed the numbers but the past trends do reflects its year-over-year growth in communities counts. With the pent-up demand still to get fully exploited the homebuilder should benefit from the growth in the housing market. However, it has admitted that it expects additional growth in its community count that was above 200 in fiscal 2014.
In addition, the company has recently brought a bond offering in the market. This bond is worth $250 million and that should allow the company to improve its community count going forward. Also, the company looks pretty solid on various other metrics such as new contracts, average selling price and dollar amount of its backlog, which reflect positive trend for the homebuilder.
Hovnanian's backlog has improved 12% year over year to $856 million as against $762 million in 2013. This increase along with rise in community count reflects its ability to improve its top as well as bottom line performance this fiscal year. Moreover, the demand for new homes is expected to increase next year that should further add incremental revenue to the homebuilder going forward.
Conclusion
Hovnanian is expected to perform better in coming years. The analysts expect its earnings to grow at CAGR of 14.45% little lower than average industry CAGR of 15.58% for the next five years. This indicates strong growth potential for the stock in the future. Also, its short-term returns are even more appealing. Its earnings are expected to grow 50.00% this year and 128.60% by next year.
The homebuilder has trailing P/E of 2.16 and forward P/E of 8.42, which is little expensive. But looking at the earnings growth in the future, investors can buy more of the stocks as it will yield healthy returns in the future. Moreover, it has PEG ratio of 1.33 that continues to support its growth in the coming years. Its balance sheet carries total cash of $255.12 million and total debt of $1.89 billion.
