HOVNANIAN PREDICTS RETURN TO PROFIT; ANALYSTS SEE BIG PROBLEMS
By Linda A. Johnson

Newsday.com
6:06 PM EST, December 19, 2007

A day after reporting a huge quarterly loss, executives at
Hovnanian Enterprises Inc. predicted the homebuilder will return to
profitability _ but not until the housing market reverts to normal
conditions. Investors pounded its stock, though, driving prices down
more than 11 percent.

"Overall, the housing market remains very challenging, and it resulted
in the first fiscal-year loss for our company in a very long time,"
Ara K. Hovnanian, president and chief executive, told analysts in a
conference call Wednesday.

The Red Bank-based company posted a net loss of $469.3 million, or
$7.42 per share, for its fourth quarter, which ended Oct. 31, and a
loss of $637.8 million, or $10.11 per share, for the fiscal year. The
quarterly loss was about four times that of the year-ago period.

Quarterly revenue fell 20 percent to $1.39 billion from $1.75 billion
in the same period last year.

"We made over $1 billion pretax in ’05 and ’06, and unfortunately we’re
giving back a large chunk of those profits in ’07," Hovnanian said.

Company officials blamed most of the losses on write-offs totaling
$383 million, including $168 million to cover drops in the value of
land it owns and a $216 million non-cash valuation allowance required
by new accounting rules that say companies reporting or expecting
three straight years of losses cannot keep carrying deferred tax
credits indefinitely.

The latter charge hurt the latest results _ and indicates the company’s
auditors don’t expect to see profits soon, according to some analysts _
but Hovnanian Enterprises will still be able to deduct the deferred
credits from the taxes it would pay on future profits any time over
the next 20 years.

Hovnanian said that for the U.S. housing market to recover, inventories
of existing homes need to decline and sellers of existing homes need
to decrease their prices more in line with the sharp cuts builders
have been making to sell their new homes.

So far, the only encouraging sign the company has seen is an increase
in home sales during the first three weeks of December, but officials
would not provide any figures.

Analysts, apparently looking for other promising signs, pressed for
projections on gross margins and cash flow and asked whether further
housing price cuts will be needed, but Hovnanian executives declined
to answer, saying only that they expect a total positive cash flow
of about $100 million in fiscal year 2008, up from a negative $71
million in fiscal 2007.

They said the company has been working to cut construction and
overhead costs, has reduced staff by 43 percent since June 2006,
dropped options to buy about 18,000 building lots in fiscal 2007,
and reduced the number of lots it owns by 15 percent during the year,
to about 28,700. It also reduced its exposure to the subprime mortgages
wreaking havoc in the housing market and cut debt by $390 million in
the quarter, to a total of $2.2 billion.

However, analysts pointed to a number of problems.

UBS Securities analyst David Goldberg wrote that gross margins declined
by nearly 1 percent from last year, more than expected, and total
write-offs were higher than expected, driving "underperformance." He
now expects the company to lose $5.55 per share in 2008, 35 cents
worse than his previous estimate.

JPMorgan Securities analyst Michael Rehaut wrote that write-downs
on the value of Hovnanian’s land were "well above our estimate"
and higher than charges taken by other homebuilders.

Daniel Oppenheim of Banc of America Securities noted that Hovnanian
faces liquidity concerns and is in discussion with its banks regarding
compliance on financing.

A company spokesman said it has received a waiver on terms of loan
covenants and is negotiating new terms for its revolving credit line
to gain more flexibility.

"Unfortunately, we expect another grim spring season as high and rising
inventories continue to push home prices lower, further eroding buyers’
confidence," Oppenheim wrote in a note to clients.

Hovnanian shares fell 96 cents to $7.44 Wednesday, but rose 32 cents
in after-hours trading. Shares are down more than 75 percent from
the 52-week high of $37.58.