Should You Shack Up With This Homebuilder for 2014?

Should You Shack Up With This Homebuilder for 2014?

Sometimes the best way to hit it big is to bet small. Hovnanian Enterprises is a relatively smaller homebuilder that's posting amazing growth results. In light of similar strength from other small homebuilders such as Taylor Morrison Home Corporation and TRI Pointe Homes , Hovnanian Enterprises is poised for a fantastic 2014 and beyond.

Hovnanian Enterprises results
Hovnanian Enterprises reported fiscal fourth-quarter results on Dec. 12. Revenue popped 21.5% to $591.7 million. Net income jumped to $32.8 million or $0.21 per share, compared to a net loss of $84.4 million or $0.59 per share. The company's backlog climbed 14.3% to $848.4 million.

CEO Ara K. Hovnanian pointed out that this operating success came despite several headwinds including "higher mortgage rates, the sequester, and the government shutdown." On a year-over-year basis, he reported that sales continued to improve in October and November. He also believes that Hovnanian Enterprises will see "greater levels of profitability." Mr. Hovnanian also said, "We continue to believe that our industry is still in the early stages of a housing recovery." If true, Hovnanian Enterprises may be well positioned on the ground floor.

During the conference call, Mr. Hovnanian further explained that he believes that higher home prices and mortgage rates will become an accepted norm beginning in the spring; as a result, activity will shoot up. Household formations are the main factor that drives demand long term. This factor remains below normal levels, but it will eventually increase.

Hovnanian Enterprises believes that in 2014, the industry will start to see a move toward those normal household formation levels. Still, CFO J. Larry Sorsby stated that its increased profitability outlook for Hovnanian Enterprises assumes no changes in the market. This suggests a setup to positively surprise the street.

Interestingly, Mr. Hovnanian repeatedly emphasized that the Thanksgiving to mid-January period is a seasonally slow time for the housing industry as a whole. When pressed in the Q&A session, however, he said, "at the moment, the market has definitely gotten a little stronger." As a result, Hovnanian Enterprises isn't making any adjustments in incentives to try to spark demand. Are other small homebuilders seeing the same thing?

Other small homebuilders
Taylor Morrison Home Corporation is also seeing across-the-board success. Last quarter, it reported that home closing revenue increased 105% to $622.1 million. Its net income jumped 24.6% to $53.1 million, or $0.46 per share. CEO Sheryl Palmer expects the homebuilding industry to continue recovering, and she expects Taylor Morrison Home Corporation to continue to increase sales and profits. Its backlog exploded by 76% to $1.1 billion.

Meanwhile, TRI Pointe Homes is seeing amazing success. In the most recent quarter, home sales revenue skyrocketed 468% to $56.8 million. Net income jumped to $4.7 million or $0.15 per share as compared to a $1.5 million net loss a year ago. Backlog shot up an astounding 253% to $162.7 million.

This backlog is more than triple its previous quarter's sales. That should keep TRI Pointe Homes busy and growing for a while. COO Thomas J. Mitchell is forecasting "rapid growth" going forward.

Foolish final thoughts
In the early stages of the homebuilding recovery, small players can have an advantage, because they can pick and choose the stronger local regions that offer pockets of strength beyond the national market. Also, Hovnanian Enterprises' smaller size compared to some of the major homebuilders means that it can potentially grow at larger percentages. Look for the housing recovery to add more fuel to its fire. Fools looking for a nimble homebuilder with a bright future should give Hovnanian Enterprises a peek.

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