Hovnanian Enterprises (HOV, Financial) ended the fiscal year with impressive results in the last quarter. The company posted 18% growth in revenue, which was mainly driven by an increase in both deliveries and average sales price. However, the company had been expecting better gross margins in the fourth quarter, but it failed to achieve that level due to a soft housing market. Management is confident of a better performance, as it is encouraged by year-over-year improvements. Hovnanian is now focused on further growth in its revenue. Let's see how it plans to do so.
More improvements are expected
The company’s focus on generating good revenue will help it in managing other metrics as well. With this growth, Hovnanian will be able improve its SG&A and interest expense ratios. It is now focusing on making ways to even out its quarterly deliveries to be profitable in all the four quarters. But there are some challenges that Hovnanian is still facing and will take time to get over this weakness.
Hovnanian is expecting the housing sector to improve in the coming days. As the community count is increasing it is leading to an increase in average sales price also increasing the community count. Another good point for the company is that, due to this, the dollar amount of net contracts increased by 10% which is expected to benefit the company further, helping it to gain market share in this soft environment also.
This will help the company if the housing demand remains soft in 2015 as well, Hovnanian will be seeing growth in the community count. As this can be a growth driver in future, Hovnanian is planning to open additional communities which will position the company well to achieve higher level of home sales in 2015.
Increasing backlogs are a catalyst
In addition, the increased backlogs are also some positive indicators of company’s anticipated good performance in future. Its backlogs have also increased by 12%. Also coupled with the growth in community count, Hovnanian is expecting good support to its revenue growth strategy in future. Moreover, Hovnanian is seeing all the demographics in its favour and is expecting the housing market to improve which will surely lead the customers to buy more homes. This will also be a long term growth prospect for the company and it is now well positioned to capture this growing opportunity.
Conclusion
With a trailing P/E of 36.05 the stock looks slightly over valued. While its forward P/E of 8.41 indicates slow earnings growth which might be due to soft housing environment. Even for the next five years, the company earnings are growing with a CAGR of 12.08% which is lower than the industry average of 15.67%. considering all these facts I would like to suggest investors not to include the stock in their portfolio until it shows solid signs of gaining market share.
