Hovnanian Enterprises Small Cap Analysis

When first looking at a stock of this nature, it makes sense to consider the general direction of the industry. Since new homes built crashed during 2008 and 2009, home building rates have been slowly recovering. Housing starts for April were 853,000, up 13.1 percent from 2012. Total home sales for April rose 0.6 percent to 4.97 million. In a research report published Wednesday by JP Morgan, their analysts predicted upside in the homebuilding industry for the next 18 months.

In terms of competition, Hovnanian faces both smaller local builders and larger nationwide builders. Larger builders, such as D.R. Horton DHI, Pultegroup PHM, and Lennar LEN Corporation have more financial resources, especially cash. Hovnanian has 337 million dollars cash versus 1.4 billion, 1.5 billion, and 1.3 billion for its competitors, respectively. This could hurt Hovnanian by causing the firm to miss opportunities while land prices are still depressed or suffer significant financial difficulties if its credit is downgraded or payment become unsteady.

Another reason for concern when considering Hovnanian Enterprises is the significant amount of debt they carry. Current and long term liabilities total 2.17 billion as compared to 1.68 billion of assets. As noted in their annual report, this debt may limit the company’s ability to obtain financing, dedicate a significant amount of cash flow to interest payments, and limit flexibility. All of these factors limit potential for organic growth.

Last quarter sales increased by 32.5 percent as compared to the same quarter one year prior, with operating income rising from negative 3 million to 11 million. This corresponds with sales rising 30.8 percent and net income rising to 80 million from negative 118 million for years 2012 versus 2011.

As reported on April 30th, 32.56 percent of the float is sold short with short interest increasing since the end of February. This has correlated with share prices that are essentially flat.

While insiders have sold more shares than they have purchased, non open market acquisitions roughly match dispositions. Insiders currently own 16.3 percent of the company, which is significantly higher than the industry average. Many view this as a positive sign because management has a lot at stake and significant room to profit. For those interested in following big money, institutional ownership has dropped over 19 percent this quarter following a 28 percent rise in the previous quarter.

Shares are up Thursday on positive new home sales data released at 10 am. New home sales for April were 454,000, 2.3 percent above March and 29 percent greater than April of the previous year. Each month of 2013 has seen new home sales significantly higher than those of 2012.

Shares are currently trading at $6.06, up 2.02 percent from Wednesday’s close less than and hour into trading.