Hovnanian Enterprises, Inc.'s (NYSE:HOV) 27% Dip In Price Shows Sentiment Is Matching Earnings

Unfortunately for some shareholders, the Hovnanian Enterprises, Inc. (NYSE:HOV) share price has dived 27% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 28% share price drop.

Even after such a large drop in price, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may still consider Hovnanian Enterprises as a highly attractive investment with its 2.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With earnings growth that's superior to most other companies of late, Hovnanian Enterprises has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Hovnanian Enterprises

Want the full picture on analyst estimates for the company? Then our free report on Hovnanian Enterprises will help you uncover what's on the horizon.

Is There Any Growth For Hovnanian Enterprises?

In order to justify its P/E ratio, Hovnanian Enterprises would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 56% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 62% as estimated by the lone analyst watching the company. That's not great when the rest of the market is expected to grow by 14%.

With this information, we are not surprised that Hovnanian Enterprises is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Hovnanian Enterprises' P/E?

Shares in Hovnanian Enterprises have plummeted and its P/E is now low enough to touch the ground. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Hovnanian Enterprises' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Hovnanian Enterprises (2 don't sit too well with us!) that you need to be mindful of.

You might be able to find a better investment than Hovnanian Enterprises. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.