Hovnanian Hammered

Hovnanian Enterprises(HOV Quote - Cramer on HOV - Stock Picks) reported that its fourth-quarter loss nearly quadrupled, as large land writedowns led to the company to breach covenants on its credit facility.

Shares fell 7% in early trading Wednesday to 7.81

While analysts expected the results to be ugly, the report contained fresh evidence that auditors are starting to look more closely at homebuilders' accounting assumptions. This process may speed up further impairment charges and lead to rapidly eroding book value among builders.

Hovnanian reported a quarterly loss of $469 million, or $7.42 per share. Analysts expected a loss of $1.49 per share. A year ago, the builder reported a loss of $118 million, or $1.88 per share.

Revenue fell 22% from last year to $4.8 billion, as home closings and average selling prices remained weak.

Hovnanian's bottom line was slammed by $383 million of impairments charges related to writedowns of land holdings and joint venture investments.

The company also booked a sizeable $216 million reserve against its deferred tax assets.

A company books a deferred tax asset when it feels it can reduce its future income tax expenses. The asset is typically created when a company is booking losses and feels it can use net loss carryovers against income in the future, but reversing the benefit indicates the company doesn't expect a profit any time soon.

Stephen East, an analyst with Pali Capital, says the reserve carries broader implications for the industry.

"Basically, by forcing the reversal, the auditors are in essence saying to (Hovnanian) that they have no credible plan to show that they can make money before charges over the near term," East wrote in a research note.

Though it recorded losses, Hovnanian said it generated $376 million of cash flow from operations that was used to pay down $390 million of debt.

During the quarter, the company received a waiver from its credit facility lenders since the company violated tangible net worth covenants because of the large land writedowns.

Larry Sorsby, the firm's chief financial officer, remained optimistic, saying in a statement that he believes the lenders will negotiate changes in the credit agreement going forward.

"We believe the banks will provide waivers but reduce the availability under its borrowing base and potentially secure the revolver with its assets," Bank of America analyst Daniel Oppenheim said in a research note.