Saturday, January 24, 2009

Bloomberg: Hovnanian (HOV) May Fail Absent Miracle

One of my incorrect calls in late 2007 was a series of good sized homebuilders to go out of business. A few smaller names have but no real major national brands. The banks have been extremely lenient with the homebuilders, changing covenants and the like - so the rationalization of the system has not taken place. However, according to this Bloomberg story - one of the national names - Hovnanian (HOV) might be on the emergency table.

If we look at the chart, things do not look so rosy but we might have a heck of a bounce first (nice double bottom forming for those with brass cajones) ;)

  • Hovnanian Enterprises Inc., New Jersey’s largest homebuilder, could go out of business “absent a miracle” bolstering its equity and cash reserves, bond analyst Vicki Bryan said today. Hovnanian denied it was in trouble.
  • “In 2008, builders generated billions of dollars in tax refunds, asset sales and in savings by not buying land for development,” Bryan, of New York-based Gimme Credit LLC, wrote in a report today. “These lucrative sources will not be available on the same scale this year, and there is little room to cut costs as revenue declines further.”
  • Hovnanian’s market value has tumbled 98 percent from its peak on July 20, 2005. The builder was last profitable in the fiscal first quarter of 2007.
  • It seems odd that an analyst would not understand that we ended fiscal 2008 with over $800 million in cash and only have $100 million of debt maturing before 2012,” Hovnanian Chief Financial Officer Larry Sorsby said in an e-mail today. “We have weathered many industry downturns during our 50-year history and strongly believe we have the liquidity to weather the current downturn as well.”
  • Bryan, in her report, also mentioned Beazer Homes USA Inc., an Atlanta-based homebuilder whose market value has plummeted 99 percent since January 2006 to $44 million.
  • Hovnanian and Beazer could fail in 2009 absent a miracle, and soon, that would shore up cash and equity,” she wrote.
  • Standard & Poor cut Hovnanian’s credit rating Dec. 5 to “selective default” after the company raised $29.3 million of a planned $250 million in a bond exchange of new third-lien 18 percent secured notes. The New York-based ratings company said it moved Hovnanian off its credit watch list with negative implications.
As I said, I was wrong as I (like the analysts) though Beazer would go out.... a year ago. [Jan 29, 2008: Credit Default Swaps Paint Ugly Picture for Homebuilders] And Standard Pacific [Jan 11, 2008: Standard Pacific (SPF) - the First Major Homebuilder to Go?] Both still living in a somewhat zombie state. Excellent short opportunities back then - but no bankruptcies.

If these stocks somehow exist when the housing "rebound" happens, these are exactly the type of stocks that can make you a ton of money in a very short period of time; or erase all your capital. Or you could go to Vegas (they need your business) and just put it all on black. Or red.

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