In May, the company issued 14 million shares to raise money, but, in the end, really just diluted value of its stockowners’ holdings. The more shares on the market the less they’re worth, so that lessens the amount of money that Hovnanian actually raised. Forget about the fact that the stock is down 32% from the offering price.
Hovnanian also sold $600 billion worth of bonds – with an 11.5% interest rate.
So the company’s balance sheet is “hideous,” Cramer said, now that it’s carrying $2.5 billion in senior debt but only $677 million on cash for homebuilding operations. And Hovnanian isn’t known for handling debt well. Last December, the company withheld dividends on its preferred stock in 2008 to keep from violating loan covenants. That amounted to $10 million coming right out of investors’ pockets.
Cramer admitted that Hovnanian needed this financing to survive, but now the company has a 70% net debt-to-capital ratio. Compare that with 20% for HOV’s peers. In effect, Hovnanian’s sacrificed future growth because all its profits will go toward paying interest for the foreseeable future.
And that ain’t the end of it. The Street’s expecting Hovnanian to slash prices on its homes to move inventory so it can make its cash flow targets. Gross margins at the company were already down to 8.5% from 15.9% in this latest quarter. Cramer doubted the intelligence of such a move, especially with under a year before his predicted bottom in housing.
To top it all off, analysts are expecting more land charges this quarter than last thanks to that inventory fire sale, and Credit Suisse sees Hovnanian losing another 43% in book value.
Cramer’s expecting the next few quarters in the housing sector to be a difficult daily grind. Even if many or most of them ultimately keep going higher, he said, “It’s still going to be a case of survival of the fittest. And, to me, Hovnanian is supremely unfit.”
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