Is There Hope Left for This Company?

Wow! Here's a homebuilder that has done something most of its peers could not -- report better-than-anticipated numbers. At a time when most homebuilders went deeper in the red and were gasping for breath, Hovnanian Enterprises' (NYS: HOV) net losses actually narrowed year over year.

Sounds interesting in this poisonous housing market, doesn't it? But wait -- there's more to the numbers than meets the eye.

The numbers
With deliveries falling 20% from the year-ago quarter, Hovnanian's revenue slipped 25% to $285.6 million. The debt ceiling chaos and overall economic gloom have been keeping homebuyers away, adding to the already existing woes such as the expiry of federal tax credit that helped boost sales last year.

As expected, these factors hit sales of most homebuilders. PulteGroup's (NYS: PHM) second-quarter home sales, for instance, fell 29% as tax credits weren't there to woo buyers. Similarly, Beazer Homes' (NYS: BZH) third-quarter sales were down by 47.6%, while NVR (NYS: NVR) reported a 28% slump in its second-quarter earnings.

Lower costs and expenses somewhat helped Hovnanian post a smaller loss of $50.9 million, compared with $72.9 million a year ago.

Some positives
Not everything about Hovnanian's numbers is negative, though. Backlogs -- the indicator of future business -- were up 14%. This is noteworthy, especially when a player like KB Home (NYS: KBH) reported a sharp fall in its second-quarter backlogs.

Hovnanian's net contracts (new contracts for purchases signed less prior contracts cancelled) increased an impressive 33%, with contract cancellation rates falling a bit over last year's.

Hovnanian might be struggling to generate sales, but at least it has started losing less money now.

Scary financials
Heavy debt is nothing new for homebuilders. But Hovnanian's financials seem too dismal to even talk about. What else can you say about a company that has a huge $1.7 billion worth of long-term debt on its books but meager cash equivalents of $273.4 million? Worse, accumulating losses have resulted in negative equity, and the company looks almost entirely capitalized on debt (its total-debt-to-capital ratio is 129.6%).

Another concerning factor is Hovnanian's depleting cash balance. The company is lapping up land, probably hoping for an upturn in the market. Sadly, for a company with weakening revenues and such high debt, the strategy of investing more in land doesn't make a lot of sense to me.

And when management itself says there's uncertainty regarding the longer-term cash flow guidance they provided earlier, there's really not much left to argue about.

The Foolish bottom line
Frankly speaking, I cannot foresee much for the New Jersey-based company. Moreover, high employment rates and stricter lending norms continue to burden homebuilders. Given how weak the balance sheet is, prudent long-term investors might not even want to give the company a second look.

What do you think?

At the time thisarticle was published Neha Chamaria does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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