Can Hovnanian Earnings Outpace Beazer Homes and Standard Pacific?

Hovnanian Enterprises will release its quarterly report on Thursday, and investors have been on edge for months over the homebuilder's future prospects. Although housing prices have rebounded considerably over the past year, Hovnanian and rivals Beazer Homes and Standard Pacific are all fighting against the tide of higher interest rates. With some fearing that rising mortgage rates could hurt affordability and put an end to the housing recovery, will Hovnanian be able to keep its earnings moving higher?

Hovnanian took a huge hit during the housing bust, as the collapse in home prices sent the company to the brink with losses of more than 95% from its 2005-06 highs. The homebuilder's stock has rebounded considerably since then, but it still trades at less than a tenth of its all-time high. With Standard Pacific, Beazer, and other competitors working hard to recover as well, will Hovnanian ever work its way back up to new record share prices? Let's take an early look at what's been happening with Hovnanian Enterprises over the past quarter and what we're likely to see in its report.

Stats on Hovnanian Enterprises

Source: Yahoo! Finance.

Can Hovnanian earnings grow faster?
In recent months, analysts have been slightly negative on their views for Hovnanian earnings, keeping their October-quarter estimates stable but cutting their full-year fiscal 2014 projections by $0.03 per share. The stock has largely been in a holding pattern, rising about 1% since early September.

Hovnanian painted a mixed picture in its July quarter earnings report, leaving investors uncertain about the homebuilder's future prospects. Revenue soared almost 24% from the year-ago quarter, but net income plunged by more than 75%. The company pointed to the negative impact of rising mortgage rates, but CEO Ara Hovnanian argued that the homebuilder was still "confident that the combination of pent-up housing demand and the positive long-term demographic trends for housing will drive increased demand for new homes going forward." Favorable contract-backlog expansion of 27% also pointed to the company's long-term recovery.

But Hovnanian is working to boost its capacity to take even further advantage of favorable conditions in the housing market. Last month, it announced an expansion in its land-banking arrangement with Blackstone Group's financing arm GSO Capital Partners, giving Hovnanian another $150 million to use to acquire land parcels and begin development on the properties. The arrangement allows Hovnanian to keep solid building opportunities available while also giving it more financial flexibility than it would have if it had to acquire land on its own.

In general, homebuilders should benefit in the long run from the tight supply of new homes. With new homes being built at only a fraction of the pace necessary to provide ample housing supply, Hovnanian, Standard Pacific, and Beazer all stand to gain when construction levels return to normal. That's one reason why Hovnanian's Blackstone deal is so valuable, as it sets the stage for accelerating growth.

Still, one challenge that Hovnanian shares with Beazer Homes is its exposure to the East Coast, where housing hasn't rebounded as strongly as in other parts of the country. Like Standard Pacific, Hovnanian does have a substantial presence in California, Arizona, and Texas, giving it some geographical diversity in areas with better overall conditions. But until mid-Atlantic markets rebound at the same pace as those of Florida and the Southwest, Hovnanian could find itself lagging the overall industry.

In the Hovnanian earnings report, watch to see whether net income rebounds with further revenue growth. If the homebuilder can't reverse its recent trend of weaker earnings, Hovnanian could see its shares suffer.

Get the growth you deserve
Stocks like Hovnanian can climb quickly during good times but plunge in bad times. By contrast, Motley Fool co-founder David Gardner, founder of the No. 1 growth stock newsletter in the world, has developed a unique strategy for uncovering truly wealth-changing stock picks. And he wants to share it, along with a few of his favorite growth stock superstars, WITH YOU! It's a special 100% FREE report called "6 Picks for Ultimate Growth." So stop settling for index-hugging gains... and click HERE for instant access to a whole new game plan of stock picks to help power your portfolio.

Click here to add Hovnanian Enterprises to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Can Hovnanian Earnings Outpace Beazer Homes and Standard Pacific? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned. 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.