21 Sep Adding to HOV (Hovnanian Homes)
HOV is an interesting one. Although much maligned, I give management good marks for not-diluting shareholders and navigating a real debt/maturity squeeze during 2015-2016. Despite dramatically cutting back on land purchases, they have maintained a decent business with great leverage. Here’s what I see here with HOV:
- Break-even business at the low-point of communities – communities will be growing during 2018 as land acquisitions continue to ramp up.
- Absorption is key in home builder profitability. Absorption is finally picking up again; last quarter, sales ran about 3 per community, and are approaching 3.5; Beazer also recently reported 3.4 (up 14%); the long-term average is 44 per year (3.7 per month) and if this metric keeps improving, much of the home sales gross margin falls to the bottom-line…the difference between 3.0 contracts per month and 3.8 contracts per month is $550 million in revenues and even at a GM of 17%, we are talking $95 million in additional GM with very low SG+A required. That’s $95 million on only 150 communities – HOV will have more late in 2018. HOV may be on the cusp of a major improvement of profitability. Home Builders spin major cash when absorption increases (or in this case, just gets back to 2002 numbers).
- Liquidity is solid – running $280 million; they have the money to land bank and no maturities for several years.
- Beazer is selling for 85% of Equity and HOV is trading at 60% of Equity, with greater leverage.
I expect the best is yet to come for the homebuilders. I guess we will see.