Homebuilder Hovnanian Enterprises, Inc. HOV reported a top- and bottom-line beat in its fourth-quarter results Thursday, sending shares higher by more than 10 percent.
The Analyst
MKM Partners' Megan McGrath downgraded Hovnanian's stock rating from Neutral to Sell with an unchanged $1.75 price target.
The Thesis
Shares of Hovnanian gained 12 percent Thursday in reaction to its earnings report, but the stock is now trading at 1.6x current book value, McGrath said in the downgrade report. (See the analyst's track record here.)
This valuation is expensive when looking out to 2018, hich is a "typical valuation methodology" for the sector, McGrath said. Hovnanian will likely see continued revenue declines in 2018 coupled with increasing cost headwinds, meaning any sustained improvements may be "further off than the share price is implying," the analyst said.
At Thursday's closing price of $2.96, the stock would be trading at 1.2x book value, but recent tax legislation could prompt the company to take at least a "mild impairment" to its deferred tax assets, according to MKM Partners. Assuming a 10-percent reduction in the company's DTA, its valuation would imply the stock is trading at 1.5x book value — "overdone for a company not yet profitable on an annual basis," McGrath said.
The analyst's $1.75 price target is based on what she said is a more appropriate 1x multiple on the one-year forward book value.
Price Action
Shares of Hovnanian were trading lower by 4.35 percent at $2.86 at the time of publication.
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