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Hovnanian Enterprises

(HOV) - Get Hovnanian Enterprises Inc. Class A Report

shed some light Thursday on how it may eke out earnings growth this year. But the long-term picture, which investors really care about, remains a question for the homebuilder.

In its post-earnings investor presentation, the company provided no guidance for 2007, instead offering some snazzy slides about the history of the U.S. housing market. Looking in the rearview mirror, though, won't necessarily help investors in forecasting the impact of the current housing downturn.

Late Wednesday, the company reported fiscal second-quarter earnings that beat both its own and Wall Street's lowered projections. For the second quarter ended April 30, Hovnanian reported a profit of $101 million, or $1.55 a share, down from $106.1 million, or $1.62 a share, a year earlier. Analysts, on average, expected earnings of $1.43 a share, according to Thomson First Call.

The earnings topped Hovnanian's May 1 estimate of $1.40 to $1.50 a share, which was

lowered from its earlier forecast of $1.55 to $1.80. At the time, the company said it was experiencing slower sales, higher cancellations and production delays.

As for what the future holds, the company reported a 19% decline in net new-sales contracts for the second quarter to 4,342 units. Hovnanian maintained its full-year guidance for EPS of $7.20 to $7.40, which in May was cut from a range of $8.05 to $8.40. Analysts currently expect earnings of $7 a share for the year. Last year, the builder reported earnings of $7.16 a share.

Hovnanian may in fact be able to beat analysts' $7 EPS target. On its conference call, management said that more than 85% of the company's expected closings for the year are either in backlog or have been delivered. So, delayed closings and significant margin erosion seem to be the only roadblock to exceeding estimates.

The company used the slides in its Webcast presentation to demonstrate its beliefs about the potential rebound in the housing market.

One focused on the "new jobs-to-housing permit" ratio of the U.S. economy. Whenever that ratio jumps above 1 (which it did last year), it is a good indication that the market needs to produce more housing, Hovnanian told investors on the conference call.

But other slides in the presentation told a different story. They showed how resale listings are near record highs in Orange County and the metro Washington, D.C. market. The company tried to downplay the inventory spikes by saying the excess inventory simply needs to be worked off. It's a tune echoed by almost every public homebuilder, especially

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in recent weeks as they cut their guidance.

In Orange County, resale listings peaked in recent years at 11,510 homes in August 2004, according to the Hovnanian slides. Just five months later, listings were down to a more manageable 5,715 homes -- which management suggested demonstrates how inventories can be worked off.

Interestingly, resale listings in Orange County are back to 11,375 as of April of this year. But the situation is different now than in Hovnanian's 2004 example. Take, for instance, the 30-year mortgage rate. It hovered around 5.75% during the five months after August 2004, when resale listings dropped in Orange County. Now, the 30-year mortgage is at 6.67%.

The resale listings number in Washington, D.C. was particularly gruesome. After hitting a low of 11,638 in January 2005, the listings number hit 39,201 this April, according to Hovnanian's slides. This is the highest level in the period presented on the slide, which dated from July 2004 to the present.

The growing spike in resale inventories remains a dark shadow over future homebuilder profits, as the companies are forced to offer more pricing incentives and spend more on advertising for new homes. Hovnanian's cancellation rate reached a high of 32% in the current quarter, compared with 21% a year ago. Further, gross margins dropped to 23.7% from 26.4% a year earlier.

Hovnanian shares were up about 3.8% to $33.05 in afternoon trading, which is about 1.09 times its book value in the most recent quarter.

"Our shares are now valued below our projected year-end book value," CEO Ara Hovnanian told investors on the conference call.

"Even if the most dire outlook occurs and earnings are cut in half (in 2007) ... we'd be trading at about 8.8 times earnings," he says. Historically, builders have traded at forward P/E multiples of five to 10 times earnings.