If You Like EPS Growth Then Check Out Hovnanian Enterprises (NYSE:HOV) Before It's Too Late
It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. And in their study titled Who Falls Prey to the Wolf of Wall Street?' Leuz et. al. found that it is 'quite common' for investors to lose money by buying into 'pump and dump' schemes.
So if you're like me, you might be more interested in profitable, growing companies, like Hovnanian Enterprises (NYSE:HOV). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
Check out our latest analysis for Hovnanian Enterprises
Hovnanian Enterprises's Improving Profits
In business, though not in life, profits are a key measure of success; and share prices tend to reflect earnings per share (EPS). So like the hint of a smile on a face that I love, growing EPS generally makes me look twice. It is therefore awe-striking that Hovnanian Enterprises's EPS went from US$11.73 to US$98.41 in just one year. When you see earnings grow that quickly, it often means good things ahead for the company.
I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). Not all of Hovnanian Enterprises's revenue this year is revenue from operations, so keep in mind the revenue and margin numbers I've used might not be the best representation of the underlying business. The good news is that Hovnanian Enterprises is growing revenues, and EBIT margins improved by 2.4 percentage points to 9.5%, over the last year. Ticking those two boxes is a good sign of growth, in my book.
You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.
Since Hovnanian Enterprises is no giant, with a market capitalization of US$291m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are Hovnanian Enterprises Insiders Aligned With All Shareholders?
It makes me feel more secure owning shares in a company if insiders also own shares, thusly more closely aligning our interests. As a result, I'm encouraged by the fact that insiders own Hovnanian Enterprises shares worth a considerable sum. Given insiders own a small fortune of shares, currently valued at US$53m, they have plenty of motivation to push the business to succeed. At 18% of the company, the co-investment by insiders gives me confidence that management will make long-term focussed decisions.
Is Hovnanian Enterprises Worth Keeping An Eye On?
Hovnanian Enterprises's earnings per share growth have been levitating higher, like a mountain goat scaling the Alps. That EPS growth certainly has my attention, and the large insider ownership only serves to further stoke my interest. The hope is, of course, that the strong growth marks a fundamental improvement in the business economics. So yes, on this short analysis I do think it's worth considering Hovnanian Enterprises for a spot on your watchlist. We should say that we've discovered 3 warning signs for Hovnanian Enterprises (2 can't be ignored!) that you should be aware of before investing here.
Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access a free list of them here.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
