Hovnanian Enterprises reported third quarter results yesterday, with earnings per share coming in below estimates. After some disappointing results in past quarters, its pure home-building fundamentals didn’t look bad compared to expectations. 

While home building revenue fell 2%, its gross margins rose to 17.8% for the third quarter of fiscal 2015, up 170 basis points from 16.1% during the second quarter of fiscal 2015 (though they were down 350 basis points year over year). 

“Much of our third quarter gross margin improvement was due to both reducing the number of spec homes that we offered and the steps that we took to lower the incentives on—to lower the levels of incentives in concessions offered on the spec homes,” said chairman, president, and CEO Ara Hovnanian on the company’s earnings call.

Hovnanian’s 13% order growth met J.P. Morgan’s estimates. Those were driven by a 7% jump in absorption. Its community count rose 4%, which was below expectations. Orders rose 55% in the West, 33% in the Southeast, 17% in the Northeast, 16% in the Mid-Atlantic, and 11% in the Southwest. The Midwest fell 15%.

So far, Houston is performing relatively well, though Hovnanian indicated the builder could walk from options contracts if things deteriorate.

“Houston remains a hot topic within our industry, so I want to provide a brief update on what we’re seeing in that market,” Hovnanian said. “With an average sales price of $312,000 in Houston compared to our company average sales price of $404,000, our primary focus in Houston is on entry and first-time move-up product.”

Hovnanian has taken steps to boost its results by bringing in a number of new business unit presidents. “A few examples include hiring the former COO of Meritage Homes as a group president over our Arizona and California operations; a former corporate EVP and regional president with Centex to run our Minnesota division; a former regional president from a top 10 builder to oversee our Florida operations; and several other new division presidents formerly with other top 10 public builders to run some of our other divisions,” Hovnanian said on the call.

J.P. Morgan’s Michael Rehaut isn’t sure what to expect from the company the rest of the year. “While the midpoint of FY16 guidance is slightly above the Street, given guidance’s wide range, as well as some disappointing results over the last several quarters, we believe this will be more viewed by investors from a 'wait and see' perspective,” he wrote.

Hovnanian spent $130 million on land and land development as its home building cash fell to $208 million from $257 million. It had $49 million available under its credit facility at the end of the quarter.

“Regarding valuation, while we believe the company’s capital structure requires additional equity, we note that Hovnanian is currently trading at 7.2x our FY16E EPS, which appears reasonable, in our view, given the company’s high leverage versus its peers and below average gross margins,” Rehaut wrote.