Yahoo Finance Is Hovnanian Enterprises Inc’s (NYSE:HOV) CEO Being Overpaid?
Leading Hovnanian Enterprises Inc (NYSE:HOV) as the CEO, Ara Hovnanian took the company to a valuation of US$275.12M. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. This is because, if incentives are aligned, more value is created for shareholders which directly impacts your returns as an investor. Today we will assess Hovnanian’s pay and compare this to the company’s performance over the same period, as well as measure it against other US CEOs leading companies of similar size and profitability. Check out our latest analysis for Hovnanian Enterprises
Did Hovnanian create value?
Profitability of a company is a strong indication of HOV’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Hovnanian’s performance. Most recently, HOV released negative earnings of -US$362.86M , compared to the previous year’s positive earnings. Though, on average, HOV has been loss-making in the past, with a 5-year average EPS of -US$0.41. In the situation of unprofitability the company may be going through a period of reinvestment and growth, or it can be a signal of some headwind. In any event, CEO compensation should emulate the current condition of the business. From the latest financial report, Hovnanian’s total compensation dropped by a non-trivial rate of -27.08%, to US$5.26M. In addition to this, Hovnanian’s pay is also made up of 10.53% non-cash elements, which means that variabilities in HOV’s share price can impact the actual level of what the CEO actually takes home at the end of the day.
Is HOV’s CEO overpaid relative to the market?
Even though one size does not fit all, as remuneration should account for specific factors of the company and market, we can fashion a high-level benchmark to see if HOV is an outlier. This outcome can help direct shareholders to ask the right question about Hovnanian’s incentive alignment. Typically, a US small-cap is worth around $1B, generates earnings of $96M, and pays its CEO circa $2.7M annually. Typically I would look at market cap and earnings as a proxy for performance, however, HOV’s negative earnings reduces the effectiveness of this method. Given the range of pay for small-cap executives, it seems like Hovnanian’s pay exceeds its peer group.
What this means for you:
HOV may be paying its CEO above-market rates due to many reasons – retention, reward, or inflated non-cash components of total pay. However, shareholders also should be aware of what the appropriate level is. Boards should be transparent with how they structure CEO pay given that there should be nothing to hide in public companies. Hopefully this analysis has given you the basis for questioning the next CEO pay raise. If you have not done so already, I urge you to complete your research by taking a look at the following:
Governance: To find out more about HOV’s governance, look through our infographic report of the company’s board and management.
Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of HOV? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
