Home Sweet Homebuilder
By Stephen D. Simpson, CFA

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The Motley Fool
06/01/2005

Hey, anybody hear that we’re in a housing boom?

Yeah, I thought so.

One of the 10 largest homebuilders in the country, Hovnanian
Enterprises(NYSE: HOV), reported sound second-quarter results. Revenue
grew 32% for the quarter, and net income grew 51% with better margins.

Although new orders dipped a bit in the quarter, Hovnanian delivered
about 12% more homes in the quarter than during the year-ago period,
and the average selling prices of those homes climbed by about
18%. Backlog also grew strongly, whether measured in numbers of
homes (35.7%) or dollar value (61%). Stripping out unconsolidated
joint-venture contributions, both figures were still positive, with
homes increasing 12.5% and dollar value growing by almost 18%.

Also important, Hovnanian continues to report excellent efficiency
numbers. The annualized return on equity for the quarter exceeded 30%,
and the annualized return on assets is solidly in the double digits.

Of course, you can’t talk about a homebuilder without talking about the
housing bubble. Honestly, I’d rather go through a Novocain-free root
canal than talk about whether there is, or isn’t, a housing bubble
in the country. So I’ll say two things. First, if you really want to
hear about the housing market, watch the Fox News financial programs on
Saturday — that seems to be the only thing the people on those shows
want to talk about. Second, remember this: Whenever someone tells you
“It’s different this time,” it’s probably not different, and that
person is probably trying to sell you something you don’t really want.

Though Hovnanian carries a fair bit of debt, it’s not out of line with
similar builders. What’s more, the company generates solid margins
and returns on its capital. Like other homebuilders, Hovnanian trades
at a valuation that suggests we’re at or near peak cycle times. I’m
not inclined to disagree, but there’s no doubt that business today
is still quite strong.

Fool contributor Stephen Simpson has no financial interest in any
stocks mentioned (that means he’s neither long nor short the shares).