Hovnanian Enterprises (NYSE:HOV) became a penny stock at the onset of the housing crash, and ten years later, it still is. One analyst, George Putnam, editor of the Turnaround Letter, thinks that might be about to change.

Debt financing that seemed reasonable prior to the 2009 financial crisis became a millstone in its aftermath. The high interest payments and tight bond covenants severely limited Hovnanian’s ability to build new homes. The $2.2 billion in expensive debt in 2008 has been trimmed to $1.7 billion today, mostly through dilutive equity offerings.

A recent debt refinancing should provide considerable financial flexibility, but it involves an intentional, technical default that has rattled shareholders and threatens a potentially costly legal entanglement.

Rising labor and raw materials costs, along with fears of a housing downturn, add to investor worries that have driven the shares down 40% this year to levels not seen since the depths of the financial crisis.

We view Hovnanian as a recovering home builder with a poor but improving balance sheet. Its substandard profit margins will likely begin to turn up, and its new financing will allow it to increase its construction pace.

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