After a fiscal first quarter of 2009 that was nothing to write home about--losses increased year over year--analysts expect Hovnanian Enterprises' earnings for fiscal second quarter, ended April 30, to show a marked improvement. The consensus on the Street was that losses will come in around $1.26 per share, compared with $2.29 a share last quarter.

Driving the improvement likely will be a combination of both fewer pre-tax charges and stronger sales figures. Credit Suisse analyst Dan Oppenheim estimated that the balance-sheet impairments will clock in around $85 million, according to a recent research note, versus last quarter's $132 million in land-related charges and a FAS 109 tax valuation allowance charge of $79.4 million.

However, JPMorgan analyst Mike Rehaut took a more pessimistic view on possible charges, anticipating a pre-tax charge to earnings in the ballpark of $115 million. Charges of that magnitude would represent a 44% hit to equity, he noted in a related research release.

Both Rehaut and Oppenheim predicted new orders would be a struggle, penciling a 40% and 45% fall-off from the previous year, respectively. However, year-over-year declines could fare better than those estimates given the lift many of Hovnanian's peers have felt in California during their calendar first quarters, thanks in part to the state new-home buyer tax credit. An early indication that this could be the case for Hovnanian was a press release issued by the company's Southern California division April 21. The release stated:

"The Southern California Division has reported a 120% increase in homes sold during first quarter 2009 over fourth quarter 2008 at 12 of its neighborhoods. 'It's encouraging to see the market pick up the pace,' commented Jim Perry, Southern California division president, for K. Hovnanian Homes. 'We're convinced that with our ability to provide excellent customer service and the perfect home at an attractive price, buyers will continue to respond to whatever the market conditions may be.'"

Last quarter, net contracts, excluding unconsolidated joint ventures, declined 36% year over year to 961 homes. The average price was $247,158, down 18.4% from the same period the previous year.

But a quickening of the sales pulse will hardly get the company out of the woods. With a 90.5% net debt to cap rate, the company is under serious pressure to delever. Analysts applauded last quarter's announcement of the company's move to tap the loosening debt markets following the quarter close, purchasing $314 million in notes for $105 million, resulting in a pre-tax gain of roughly $210 million.

While the move was considered a plus for the company, it failed to stop Fitch Ratings from slashing the company's debt further into junk status in mid-March. The ratings agency cited "persistent negative trends in HOV's operating margins, further deterioration in credit metrics, and erosion in tangible net worth from non-cash real estate charges and operating losses" as reasons for the ratings slide.

Fiscal second quarter results also are likely to show a sizeable uptick in the company's cash stash, as management tries to reduce the company's debt burden. During last quarter's earnings call, CFO Larry Sorsby said management was "laser focused" on generating more cash, adding that boosting the company's cash position "drives virtually every decision we make."

The one plus, as Oppenheim noted, is that even with a heavy debt load, Hovnanian's "lack of near-term maturities gives them some breathing room."

But the battle back to the black will be a tough one, given the company's financial instability and continued depressed housing conditions. As JMP Securities analyst Jim Wilson noted in his commentary following Hovnanian's fiscal first quarter earnings call, "HOV is in one of the toughest positions in the public home building sector, with no return to profitability in sight, a weak balance sheet, and significant impairments still to come; despite limited equity value, however, the company does appear to have the liquidity to survive for the foreseeable future."