Hovnanian Builds A Case For Profit

Hovnanian, Smaller Is Sometimes Better

Hovnanian (NYSE:HOV) is one of the smallest home builders on the market but not one that should be discounted. With building permits at a near-record and up 25.4% on a YOY basis it looks like every builder on the market is in for profits. That said, Hovnanian just delivered a Q4 report that not only outperformed its larger brethren but points to accelerated earnings for itself and the entire home building industry.

Hovnanian, Outpacing The Competition

Hovnanian may be small but it packs a big punch. The company reported a strong quarter and one that outpaced many of its larger competitors. There are no analysts targets to compare to but the 16.3% YOY increase in revenue is more than decent compared to 6% for Pulte Group, -2% for Lennar, and -24% for KB Homes in the most comparable quarter period. The gains are driven by an uptick in activity compounded by what the company calls aggressive price increases. The price increases are targeted and maintaining and improving margins and have so far been successful.

“We are pleased with our fiscal 2021 first-quarter results, as they exceeded the guidance we provided on our last conference call for gross margin percentage, total SG&A ratio, adjusted EBITDA and adjusted pretax income,” stated Ara K. Hovnanian, Chairman of the Board, President, and Chief Executive Officer. “Contracts per community this quarter increased 74%, clearly indicating that demand for our homes remains very strong. We plan to continue to increase home prices in order to stay ahead of rising costs, maximize our profits and to better align our sales pace with our production capacity.”

In terms of deliveries, the company completed and closed on 1,385 houses or up 12.1% from last year. Looking forward, the company’s momentum should continue due to rising backlogs. The backlog of new homes is up 85% from last year and driving an increase in land-spend. Moving down the report, the company was able to control costs well in the face of rising prices and reduce SG&A as a percentage of revenue. The SG&A expense came in at 11.1% or down 110 basis points to help drive a 440 bps increase in gross margin.

On the bottom line, the $2.75 in GAAP earnings is down sequentially but mitigated by two factors. The first is that this year’s positive earnings reverse a loss of $1.48 in the prior-year period, the second is that increased land-spend, up 51%, can account for a large position of the difference.

Hovnanian Is Geared For Growth

Hovnanian was able to give us some guidance and the guidance is more than robust. The company is expecting to see revenue come in about 59% above last year’s level at the midpoint of the range. For the full-year, the company is expecting $2.65 to $2.80 in consolidated revenue or up about 35% at the low end of the range. To accommodate this growth, the company has aggressively upped its land-spend so new acquisitions are outpacing completions. The company picked up 755 net new lots during the Q1 period and now controls enough inventory for 4.6 years based on the TTM data.

The Technical Outlook: Hovnanian Break Out, New Highs Ahead

Hovnanian surged more than 17% on the Q1 news and looks like it will continue to go higher. The breakout confirms a bullish consolidation and is supported by the indicators so no reason to be bearish. Based on the magnitude of the rally preceding the consolidation and breakout, about $30, we think this stock could reach the $90 level before peaking.