As we discussed on our first quarter conference call, we expected our second quarter gross margin to be adversely affected by incentives and concessions on started unsold homes. However, the impact was greater than we anticipated and we are disappointed with our second quarter results. ¬†– Ara K. Hovnanian, Chairman of the Board, President and Chief Executive Officer, ¬†HOV 2nd Qtr 8-k
There’s a reason Ara Hovnanian dumped 315,000 shares of HOV stock on April 16th, 2015 – Insider stock selling ahead of an earnings disaster.
Hovnanian greeted the stock market this morning with a big earnings miss. ¬†It’s stock plunged as much as 15%:
I may have been a bit early in forecasting my demise of the housing market, but I know I’m right. ¬†HOV is the 7th largest homebuilder in the country. ¬†It sells homes in 18 States, including the largest housing markets for new homes like California, Texas and Florida. ¬† HOV primarily sells into the first-time and move-up buyer market. ¬†In other words, it’s Q2 results are a good barometer of the market for new home sales in general.
Although it’s revenues were higher thanks to the bubble in new home prices, HOV’s gross margins plunged 400 basis points from 20.1% last year in Q2 to 16.1% in its latest quarter. This is due to the expense associated with started but unsold homes. A feature that is endemic to every homebuilder I research. ¬†It’s total unit home deliveries dropped 3.2% vs. the Q2 2014.
It’s Cost of Sales also includes over $4 million inventory and land option write-offs vs. $522k in Q2 2014. While not large relative to its total cost of sales, inventory and land write-offs are going to become a recurring feature with every homebuilder going forward.
Despite a decline in home deliveries, HOV ballooned its inventory by $200 million in the last six months ($1.3 billion in Oct 2014 vs. 1.5 billion at the end of the most recent quarter). Inventories at all of the homebuilders have swelled up to record levels – even highher than at the peak of the big housing bubble. This is despite the fact that unit sales volume is roughly 1/3 of peak unit sales volume.
An even more shocking fact is that the amount of debt per housing unit sold at EVERY homebuilder is several times higher than it was at the peak of the housing bubble. For instance, at $1.95 billion HOV’s debt load has increased $259 million in the last six months. On a trailing 12 month basis, HOV has delivered 5,836 homes. This translates into $333,790 of debt per home unit delivered.
I have always predicted that HOV would be the first homebuilder to hit the wall. ¬†This is why I have not published a research report on the Company: It’s stock has been below $10 since late 2007.¬†It’s not worth shorting.
However, I have published in-depth research reports on the two stocks that I think are most likely to follow HOV into the bankruptcy abyss. ¬†Both of these companies have operating and financial profiles which are quite similar to that of HOV. ¬†Both of these stocks plunged and then rebounded about six months ago. ¬†I believe that we will see them plunge and stay down at some point in the next 3-6 months. ¬†The problem is, you have to positioned ahead of the plunge or you will miss it.
You can access the report for either company here:
I will have more on this later, but now the legacy home equity loans left over from the big housing bubble are going to start torpedo-ing the financial system. No one has thought about these roadside financial exploding devices, but starting in mid-2014 and ballooning up quickly from there, home equity loans sitting dormant other than a small monthly interest payment have been and will be converting to fixed-rate amortizing 2nd mortgages. The monthly payment on these will double or triple for most homeowners with HELOCs resetting. The amount sitting on bank balance sheets is over a half trillion dollars. For its quarter ended March 31, the delinquency rate on its HELOC balances jumped 124%.
Just when mom and pop home flippers were thinking that the water was nice and warm, they are going to get ripped apart by a new wave of distressed home sellers and foreclosure auctions. For the record, I search for home listings on just one zip code in central Denver. I am now getting at least one “new price” email per day, including three yesterday and one today already. The next leg down in the housing market is starting…