Hovnanian Enterprises (HOV, Financial) delivered impressive revenue growth during the first quarter, and these year-over-year enhancements depicts the efficiencies it gained through expanding its top line. Moving ahead, it is significantly focused on delivering extreme growth in revenue to capture extra efficiencies and generate superior shareholder returns.
Progressing in the right direction
Hovnanian is illustrating a trend of expanding the spec homes count from the second quarter of 2013 to the fourth quarter of 2014. However, Hovnanian has decided to reduce the spec levels in few communities and handle some previous version specs.
The notable top line growth of the company suggests significant customer traction for Hovnanian’s superior spec homes, and their deep confidence in the major home brand.
Hovnanian targets on providing greater incentives in order to lower the spec levels of few communities, which is estimated to lower the second quarter gross margin by approximately 100 basis points inferior compared to the 18.2% recorded during the first quarter. Hovnanian has made steady progress in achieving its spec reduction objectives since the fourth quarter ending. It has lowered the spec level by approximately 8% or 70 homes. This key strategy might hurt the company in the short-term but, its gross margin is bound to enhance by the year-end, with Hovnanian delivering lesser highly discounted spec homes during the third and fourth quarters.
Further, Hovnanian has also started to lower the incentive amounts being offered on its spec homes, which is believed to benefit the company’s overall gross margins.
The strategic decision of Hovnanian to lower the incentive amount being offered on its spec homes is estimated to decline the spec home demand while expand the company’s gross margins.
Improving metrics point toward better times
Hovnanian has registered a solid growth in the dollar amount of its consolidated total contracts per month for last one year. This notable expansion in the dollar amount is primarily driven by the combined effect of improved community counts and the recent strong growth in the sales.
However, Hovnanian has illustrated a continued year-over-year decline in the sales pace per community in fiscal year 2014 to 28.4 from 30.7 sales per community recorded in the fiscal year 2013.
The increase in the dollar amount for Hovnanian’s net contracts per month is expected to be slightly offset by the continued fall in the sales pace per community for the fiscal year 2014 on year-over-year basis.
Hovnanian recorded a 21% increase in the number of total contracts whereas the dollar amount of its total contract enhanced by 23% to $503 million. Going forward, Hovnanian is extremely positive about achieving improved home sales level during 2015 and achieve a breakthrough sales record in 2016, encouraged by its enhanced community count achieved till-date, coupled with the company’s plan to launch several other communities in the second half of this year.
Since last one year, Hovnanian has introduced 94 innovative communities and shut down 88 older communities. However, the company’s community shut down rate has been higher than the community set up rate which has lowered the rate of its community count growth and below the expectations.
The robust expansion in the dollar amount of its net contracts is estimated to be higher than the company’s community growth rate, which should lower its profitability, and below the expectations for the year.
Hovnanian registered a 14% growth in the dollar amount of its backlog to $926 million for the first quarter of this year compared to $815 million during the first quarter of the last year. Further, the number of homes in backlog enhanced from 2,223 in the previous year to 2,399 this year. Hence, the robust expansion in the community count coupled with significant growth in backlog is believed to enable Hovnanian to expand its top line all through the year.
Conclusion
Overall, the investors are advised to invest into the Hovnanian Enterprises Inc. looking at the satisfactory valuation levels with trailing P/E and forward P/E ratios of 1.89 and 10.40 respectively and better than the industry’s average P/E of 19.69, indicating less costly stock. The PEG ratio of 4.77 indicates slower and costlier company growth than the industry’s average of 1.06. The profit margin of 14.79% seems appealing. Still, Hovnanian needs to optimize its debt-laden balance sheet, with huge total debt of $2.12 billion against extremely smaller total cash of $269.28 million only to successfully plan for future growth investments.
