Why Hovnanian Enterprises Stock Dropped 10% This Morning

What happened

Shares of Hovnanian Enterprises (NYSE: HOV) dropped more than 10% in early trading on Thursday (yes, it happened again) after the homebuilder reported its earnings for the fiscal first quarter of 2018 -- and are still down 6.6% as of 11:10 a.m. EST.

Hovnanian reported a 24% dip in sales year over year, to $417.2 million, but gross margins climbed 130 basis points to 14.8%.

Two construction workers in hard hats facing a house while consulting house blueprints

Investors were expecting a loss, but no one planned on a loss this big. Image source: Getty Images.

So what

Problem was, even as gross margins rose, operating costs jumped even faster. Selling, general, and administrative costs in the fiscal first quarter represented 14.9% of total revenue -- a 400-basis-point increase from last year's Q1. These higher costs, combined with lower revenue, contributed to Hovnanian reporting a loss of $0.21 per share for the quarter -- versus breakeven results a year ago.

Both sales and earnings thus fell far below Wall Street's expectations. According to consensus estimates, Hovnanian was "supposed" to report only a $0.08-per-share loss on sales of $461.6 million.

Now what

Hovnanian declined to give specific earnings guidance for the year ahead, with CEO Ara Hovnanian noting that the company "remains in a transition period due to the adverse impacts from having to pay off $320 million of debt in late 2015 and 2016 when the high yield market was closed to us." That said, Hovnanian believes that "the most challenging quarter for fiscal 2018 is behind us and we expect future quarters this year should yield improved operating results."

They're just not saying how much improved -- and it seems investors aren't willing to take that point on faith.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.