RED BANK, N.J. (
) -- Earnings released during business-cycle transition periods often offer investors visibility on the pace of recovery in specific sectors, but that's probably not the case with the homebuilders, especially
, reporting tomorrow, and arguably the worst positioned of any homebuilder heading into 2010.
Recent homebuilder earnings have included some signs of encouragement -- impairments coming down, sales going up -- but the data is not nearly comprehensive enough to tilt bets towards a quick turnaround. Some of the positive data from homebuilders has even been questionable.
, for example, reported a new order spike in its most recent earnings, but at the same time reported a gross margin fall to a level it had not reached in years.
Pricing power clearly was not on the side of Toll Brothers, and that led analysts to the question: If you sell more homes, but at a lower price, do equity investors have anything to look forward to in the short-term from the homebuilding sector?
In the case of Hovnanian, several analysts said the picture, heading into tomorrow's earnings, is about as bleak as it gets in the homebuilding sector, and the earnings are almost irrelevant in terms of any indicators of a recovery for Hovnanian. While analysts expect the losses to come in, that doesn't mean Hovnanian will be returning to profitability anytime soon, analysts said.
If there is a data point to look at in the Hovnanian earnings, it is gross margins, said James Wilson, analyst at JMP Securities. Wilson said the level of impairment should be trending down for Hovnanian as it is for most homebuilders. It is the gross margin data ex-impairments that could indicate a better-than-expected outlook. If Hovnanian can somehow improve the margin ex-impairments more than expected, that would be a dramatic event that would suggest a better outlook on profitability.
Don't expect that to happen, though. Wilson and other analysts think the prospect of a dramatic gross margin improvement from Hovnanian is as remote as the prospect of the U.S. foreclosure pipeline reaching zero by Jan. 1, 2010.
"Hovnanian is the furthest away from profitability of all the public companies," Wilson said. Notably, Wilson said
is the most distressed homebuilder from a financial perspective, but Hovnanian is actually further away from profitability.
Orleans Homebuilders recently put up a for-sale sign and is facing de-listing from the New York Stock Exchange.
That's how bad the picture looks for Hovnanian. The big difference between Hovnanian and Orleans is that Hovnanian is all public debt that has been extended, while Orleans is crippled by way too much bank debt.
"Hovnanian's operating margins are near the worst, if not the worst, in the industry," said Joel Blocker, analyst with FNB Securities. "Even with a slight improvement sequentially, Hovnanian is far away from profitability." Blocker explained that there is reason to expect an improvement -- the fourth fiscal quarter is usually a higher volume period, and Hovnanian's gross margin is coming off a trough from a few quarters back.
"Hovnanian's ability to reach profitability in the next three years is unlikely. They bought so much land at the peak in 2005 that it's hard to see their way back to a profit before 2012, and I don't even know if they can do it then," JMP's Wilson said.
As for the Street estimate, a quarterly earnings per share loss of $1.49 and a full year loss of $7.68 is expected. In the previous quarter the loss per share was $2.16.
Clearly, in the case of Hovnanian, this type of earning improvement doesn't offer the kind of visibility that helps call a turnaround -- unless investors are calling a turnaround for 2012 or, just possibly, even beyond that.
Maybe some investors do have the ability to see that far ahead: Hovnanian was up 3% on Tuesday afternoon, for the second-biggest daily gain in the homebuilding sector.
-- Reported by Eric Rosenbaum in New York.
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