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Hovnanian's Miss Fuels Housing Selloff

The CEO cites 'frustration' with the marketwide setback.

Hovnanian Enterprises

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

fell 6% Thursday after the homebuilder's third-quarter profit and lackluster guidance disappointed investors.

"I certainly feel a sense of frustration" with the market reaction, CEO Ara Hovnanian said on a conference call Thursday, citing the company's solid year-over earnings growth. But investors fled shares in companies throughout the sector, which has been red hot as low mortgage rates have stoked demand for houses across the nation.

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fell 5.24%, and

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For the quarter ending July 31, Hovnanian, whose biggest markets are California and the Northeast, reported earnings of $116 million, or $1.76 a share, compared with $86.7 million, or $1.33 a share, a year earlier. Analysts expected $1.78 a share on average.

But investors likely sent shares down not only because of the third-quarter miss, but because management didn't boost its 2005 EPS guidance of $7 a share.

In a research note before the call, Craig Kucera, an analyst with Friedman Billings Ramsey, said Hovnanian is facing "a more difficult operating environment in the latter half of 2005" and that the company's "pace of organic expansion appears to be slowing while backlog conversion continues to decelerate."

"As such, we believe significant upside earnings revisions are less likely," wrote Kucera, who rates the stock market perform. FBR doesn't do investment banking for Hovnanian.

Additionally, the company's 2006 EPS guidance of $8.05 to $8.40 fell short of Wall Street's average estimate of $8.55. The company's 2006 EPS number includes a 96-cent charge related to Hovnanian's recent acquisitions of regional homebuilders. Previously, the company said there would be a 42-cent charge included in 2006 earnings.

For the third quarter, the company's backlog, including unconsolidated joint ventures, was $4.2 billion. That's up 56% from the dollar value of the backlog a year earlier.

On Thursday, Hovnanian's shares fell $3.74 to $57.85.