Red Bank, NJ, August 4, 2006--Luxury home builder Hovnanian Enterprises Inc., again cut its quarterly and full-year profit outlook on Friday, citing a slowdown in sales, high contract cancellation rates, and the cost of incentives to lure buyers.
The, company, whose shares fell 5 percent in premarket trading, said it expected earnings of $1.10 to $1.20 per diluted share for the third quarter ended July 31, down from its prior forecast of $1.40 to $1.50.
Analysts on average had forecast $1.41 per share.
Most major homebuilders have issued similar warnings in recent weeks.
Pulte Homes the No. 2 U.S. home builder has cut its forecast twice since June, pointing to steadily increasing supply and limited affordability of homes.
Other companies that have reported lower earnings and falling orders, and cut their estimates, include market leader D.R. Horton Inc., Centex Corp., Ryland Group Inc., and Toll Brothers Inc., a rival to Hovnanian in the market for high-end homes.
"Our anticipated financial results for the remainder of 2006 continue to be negatively impacted by a slower sales pace, high cancellation rates on contracts in backlog that were projected to close this year, and more pronounced use of concessions and incentives, particularly on the resale of those homes which have experienced contract cancellations," chief executive Ara Hovnanian said in a statement.
Higher prices and mortgage rates have eased demand for new homes this year, while investors who bought properties in hopes for a quick gain have flooded the market with properties they are trying to unload.
High gas prices have also crimped customers' budgets, while pricey raw materials and labor have raised construction costs.
For fiscal 2006, Hovnanian now expects earnings per share of $5 to $5.75, down sharply from its prior forecast of $7.20 to $7.40.
In May, Hovnanian lowered its outlook for the second quarter, also citing slower home sales and higher cancellation rates.
Hovnanian, which expects to release third-quarter results early next month, also said it is renegotiating a "significant number" of its land option contracts and is likely to incur costs related to walking away from these options. It said it is not able to estimate the costs, or set aside reserves to cover them.
Avondale partners analyst Barbara Allen called write downs "the next shoe to drop" in a June research note on homebuilders. Charges related to pre-development costs, including option deposits, typically take place after a downturn is well established, Allen said.
Hovnanian shares fell 5 percent to $28 in thin pre-market trading on the Inet electronic brokerage.
At Thursday's close of $29.52, Hovnanian shares closed Thursday , are down more than 40 percent in 2006, lagging its peers as measured by The Dow Jones U.S. Home Construction index, a wide barometer of home building stock activity.
That index is down 34 percent year-to-date and trading near a two-year low.
