Homebuilder Hovnanian (NYSE:HOV) has taken a beating over the past year or so, but within the company's preliminary second quarter results there is a seed of hope. I'm not overly focused on the company's bottom line at this point; instead, what I care about are cancellations, and cancellations are down.
This leads me to believe Hovnanian could be starting to claw its way back.
Cancellations are Down
When a prospective homeowner goes through the trouble of checking out a development and picking out a site it's a pretty good sign that he or she has a legitimate intention of closing on a deal. However, life is funny and sometimes things happen (death, divorce, job loss, lack of financing, change of heart etc.) and the would-be buyer cancels the transaction. As the economy has sputtered and the housing market has tanked over the last year Hovnanian and other homebuilders including Toll Brothers (NYSE:TOL), Lennar (NYSE:LEN) and Centex (NYSE:CTX) have seen skyrocketing cancellation rates.
That trend seems to be finally turning. Hovnanian's second-quarter cancellations stood at 29% of gross contracts. That's an improvement over both the comparable quarter last year of 32%, and a sequential improvement from the 38% rate it reported in Q1. This is also much better than the 40% cancellation rate it experienced in the fourth quarter of fiscal 2007.
This is also encouraging because we are heading into the summer selling season when people should be more likely to buy homes. Borrowing rates are very low, and hopefully this should keep the cancellation rate to a minimum. (For more information on how mortgage rates can influence the housing market, read How Will Your Mortgage Rate?)
Cash Flow Estimates are Up
Hovnanian also said that it is increasing its projection for positive cash flow in fiscal 2008 to greater than $300 million, which I find to be very good news.
Hovnanian previously forecast that cash flow would come in at over $100 million. This is a big jump that should grab analyst attention. It also demonstrates that management has been conservative in its forecasting. (For related reading, check out Can Earnings Guidance Accurately Predict The Future?)
More cash flow means more choices. Hovnanian could use cash to buy back stock, or to scoop up land on the cheap. If nothing else this makes me a little more confident in the company's ability to weather the current economic storm.
Bottom Line
Many of the housing markets, particularly those along the U.S. East Coast, remain under pressure. There's no guarantee that improvements will take place soon. I think it will take at least another couple of quarters for a rebound to fully kick in.
What we are seeing is the first inklings of the turnaround. Hovnanian's preliminary Q2 results contain good signs. With that said, I will continue to watch for more good news to trickle out. Although I remain cautious, I think there is the potential for some upside here.
To learn how to pick the comeback kids, see Turnaround Stocks: U-Turn To High Returns.