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Red Bank, NJ-based homebuilder Hovnanian Enterprises Inc.’s (HOV - Snapshot Report) third-quarter fiscal 2013 earnings of 6 cents per share were in line with the Zacks Consensus Estimate as strong margins offset the lower than expected top-line performance. Quarterly earnings were much higher than the year-ago quarter’s loss of 5 cents per share.

Total revenue in the quarter grew 23.6% year over year to $478.4 million as both the Homebuilding and Financial Services segments performed well in the quarter. However, revenues missed the Zacks Consensus Estimate of $499 million by 4.1% due to lower contracts.

Behind the Headline Numbers

Hovnanian Enterprises earns revenues from its homebuilding and financial services segment.

Homebuilding revenues grew 23.7% year over year to $465.5 million, driven by higher home sales.

Home sales increased 24.5% year over year to $462.4 million resulting from the increased orders and contracts owing to a higher market demand. Supply however, remains limited due to lower home inventories, both for new and existing homes.

Home prices have thus moved up sharply with the market demand gaining momentum and supply remaining limited. Land sales and other revenues amounted to $3.1 million in the quarter, down 34.6% year over year.

The value of net contracts grew 7.9% to $546.9 million, driven by increased volumes and ASPs. Though numbers of net contracts in the quarter were up 1.8% year over year to 1,568 homes, it was 19.6% lower than the second quarter of fiscal 2013.

The sequential decline in contracts was due to the moderated housing demand in some markets during July and August, resulting from higher mortgage rates, increased home prices and limited consumer confidence. 

In spite of the recently rising interest rates, they are still below historical levels and housing is still very much affordable. The company also believes that the effect of higher interest rate of is expected to be short term. Hence, it expects to achieve further profitability in fiscal 2013, on the back of increasing housing demand, solid backlog position and rising home prices.

Contract backlog (unconsolidated joint ventures included) totaled 2,893 homes as of Jul 31, 2013, up 18% year over year from 2,452 homes as of Jul 31, 2012. The value of backlog grew 26.8% year over year to $1.03 billion in the third quarter. The cancellation rate stood at 18%, better than the prior-year quarter rate of 21%.

Deliveries (unconsolidated joint ventures included) increased 8.3%year over year to 1,502 homes in the reported quarter. It was driven by an increase in demand in the homebuilding business.

The average selling price (ASP) of homes delivered stood at $358,899, up 8% year over year, driven mainly by better pricing power as housing demand grows and supply declines. The West region recorded the maximum price hike of 24.2%, followed by 13.7% hike in the Southwest region. Prices increased 12.7% and 13.0% in Mid-Atlantic and Southeast regions, respectively.

Financial services segment’s revenues climbed 19.4% to $12.9 million in the quarter driven mainly by increased homebuilding deliveries.

Margin

Adjusted homebuilding gross margin expanded 210 basis points (bps) to 20.3%, led by higher prices and favorable product mix (increased deliveries from higher margin communities) which offset headwinds from rising construction costs. Moreover, gross margins improved 140 bps sequentially.

Selling, general and administrative (SG&A) expenses increased 17.3% year over year to $56.4 million in the third quarter of fiscal 2013. SG&A, as a percentage of revenues, improved 60 bps to 11.8% as the company leveraged its fixed cost structure.

Other stocks in the construction sector that are performing well and deserve a mention include Boise Cascade Co. (BCC - Snapshot Report), Meritage Homes Corp. (MTH - Snapshot Report) and TRI Pointe Homes, Inc. (TPH - Snapshot Report). While Boise Cascade has a Zacks Rank #1 (Strong Buy), Meritage Homes and TRI Pointe Homes both carry a Zacks Rank #2 (Buy).

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