InvestorPlace Blogs is powered by Marketocracy. Marketocracy has authorized Investor Place Blogs as an official registrar for voting through Marketocracy's Investment Research Rating service. Registered members of InvestorPlace Blogs are linked with a Marketocracy account to establish voting power based on their performance of trading and posting on stocks.
Since January, Homebuilder Hovnanian Enterprises (HOV) has rallied from under 5.00 to over 12.00, before falling back to close yesterday at 7.99. Other homebuilders have rallied strongly at times this year, and Monday new home sales unexpectedly posted an increase. Is now a good time to look for value in shares of Hovnanian when doing your stock research?
Going to the SEC website, Edgar online, I checked out the latest filings, and read the forms 8-K, for news, and a prospectus 424B2, for the issuance of 14 million shares at 9.50. On May 5, HOV issued a preliminary announcement of weak operating results for the 2nd quarter of fiscal 2008, featuring a 21% year over year decline in home deliveries and a 41% decline in backlog. Additional write-offs are projected at $200-225 million. On the plus side, the company projects cash flow of more than 300 million for the year and achieved positive cash flow during the quarter.
After doing my stock research, I could see that Hovnanian experienced cash flow difficulties over the past several months, which have been resolved by the issuance of 600 million of 11.5% secured notes in a private placement along with an amended and reduced line of credit from their bank lenders. Given that cash flow is projected to be positive for the rest of 2008; and assuming that the housing market will recover in the second half of 2009, it appears that HOV may be able to avoid further dilution and return to profitable operations.
Because the company has taken substantial write-offs in recent quarters, attempts to value the stock based on EPS are not useful. Working on tangible book value, I took shareholders equity for 1Q 2008, subtracted goodwill and other intangibles, subtracted the additional 225 million of projected impairments, and added the cash from issuing the 14 million shares at 9.50. Increasing shares outstanding to account for the new issuance, I arrive at a tangible book value per share of 13.70. With the shares at 7.99, the price to tangible book works out to .6.
As a general rule, homebuilders are attractive at less than 1 X tangible book, although some value shoppers call for buying them at half that, and only after all write-offs have been taken. Keep that in mind when you're doing your own stock research. At this point, Hovnanian has taken a lot of write-offs, and with cash flow positive, they may be under less pressure to dump inventory to raise cash. Looking at their results over the long haul, tangible book was 4.67 share at the end of 1998. So, from then to now at what has to be a trough, they increased tangible book at 11% per year. Homebuilders for the past ten years have been able to increase shareholder value on this kind of a tangible basis at a rate of 20% per year until the recent slowdown. I think they can do it again over the next ten years.
A word of caution - the noteholders are secured by a lien on all the assets of Hovnanian: so, in the event of further difficulties, they will have preference over the shareholders. Some land that's been written down may be worth something in a few years, but there is always the danger that creditors will get the benefit of the assets, rather than shareholders. In my SLO portfolio, I have Toll Brothers (TOL) and Ryland (RYL), both of which seem safer to me, and both of which are trading at approximately 1 X tangible book. In my personal portfolio, I also hold KB Home (KBH); it also trades at 1 X tangible book. I think HOV is a good investment; but I would keep it small.
Homebuilders generally have been rallying off and on this year. Most observers do not expect housing to recover before the second half of next year, so the rally is possibly premature. On the other hand, the homebuilders have cleaned up their balance sheets (unlike the banks) and they have a clean track ahead of them. Prices have shown a fair amount of volatility, and I have been playing the industry by means of covered combinations. Using options, I sell covered calls, out of the money, when prices are up, as well as a few puts, also out of the money, when they are down. The premiums are pretty good and as far as I'm concerned I'm being paid to do what I want to do: buy low and sell high.
| 
RSS 2.0
