Investors Still Aren't Entirely Convinced By Hovnanian Enterprises, Inc.'s (NYSE:HOV) Earnings Despite 36% Price Jump

Hovnanian Enterprises, Inc. (NYSE:HOV) shares have continued their recent momentum with a 36% gain in the last month alone. The annual gain comes to 227% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may still consider Hovnanian Enterprises as a highly attractive investment with its 5x 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.

As an illustration, earnings have deteriorated at Hovnanian Enterprises over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Hovnanian Enterprises

Although there are no analyst estimates available for Hovnanian Enterprises, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Hovnanian Enterprises' Growth Trending?

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 a frustrating 5.1% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 293% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 10% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Hovnanian Enterprises' P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Hovnanian Enterprises' P/E

Shares in Hovnanian Enterprises are going to need a lot more upward momentum to get the company's P/E out of its slump. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Hovnanian Enterprises revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

You always need to take note of risks, for example - Hovnanian Enterprises has 3 warning signs we think you should be aware 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.