NVR Inc. (NYSE:NVR) earnings are by far the most boring earnings on my radar. This Virginia-based homebuilder and mortgage provider only publishes earnings releases and does not offer presentations, calls and or other materials. This time, I once again get to tell you how well NVR did. The company crushed earnings expectations and reported very strong new orders and higher margins. Long story short, in this article, I am going to tell you why NVR is the way to go in case you are bullish on homebuilders and why I expect the stock price to rise further.
Source: NVR Inc.New Orders Growth Up Big: Check
The graph below is the reason why homebuilders have been doing so well this year. The homebuilding ETF (ITB) is up 50% year to date. NVR is up 60%. The rally started when times were tough. Back at the end of 2018, building permits were in a downtrend as you can see below. Permits peaked in 2017 after global economic growth and rising rates pushed down single-family housing sentiment and housing sentiment in general. Once that happened, global yields started a massive downtrend which caused investors to buy homebuilders. Homebuilders were one of the few cyclical stocks that actually did outperform during the past 12 months while other cyclicals like transportation stocks and industrials were down.
Fortunately, investors got what they were betting on as building permits did rally. Over the past 2 months, building permits were up 12% (August) and 7% (September) and are currently at multi-year highs, which is a good sign that low rates are actually being used to invest in housing projects.
NVR is benefiting as well. The outperformer just reported adjusted EPS of $56.11 in the third quarter which is well above expectations of $51.78. This is the seventh consecutive earnings beat and another double-digit growth rate. This time, EPS growth hit 16%.
Sales totaled $1.91 billion, which is an improvement of 3% compared to the prior-year quarter when sales came in at $1.82 billion.
To me, however, the most important number is net orders growth as this either confirms or denies the direction set by leading indicators like building permits. In this case, new orders increased by 11% to 4,766 units compared to 4,302 units in Q3 of 2018. The average sales price was $369,200, which is a decline of 1%. This is a common trend among homebuilders as some major markets are seeing pressure on prices and outperforming growth in cheaper regions which is pushing down the average selling price. So far, I have not yet seen proof that lower prices are a result of overall structural weakness, which is a good sign. It also makes sense that NVR average selling prices are down only 1% as the average selling price is already below some of its higher-income market peers.
Backlog was down 7% to $3.4 billion compared to the prior-year quarter, while total homebuilding revenues for the quarter were up 4%. Gross margin in the third quarter increased by 40 basis points to 19.0%.
Another sign of strength came from the company's mortgage banking segment which generated loans worth $1.37 billion in the third quarter. This is an increase of 10% on a year-on-year basis. Income before tax from this segment totaled $21.4 million, which is down 16%. This decline is due to a 12% decline in mortgage banking fees resulting from the timing of loan sales and a lower fair value measurement adjustment.
The bigger picture shows how well the company is doing. Without any significant bumps in the road, the company managed to push sales to yet another all-time high. Operating income is still below its highs, but I expect new highs maybe in 2020 if the homebuilding market is able to keep its strength.
Net income is at new highs as the company is known for its buybacks. In the most recent quarter, the total outstanding share count was lowered to 3,988 thousand shares, which is down 1.7% compared to the prior-year quarter. The pace of the decline is significantly slower, but the long-term trend is remarkable.Data by YChartsBottom Line
NVR did what it has done frequently in the past: the company reported rock solid earnings growth. The company easily beat expectations thanks to strong sales, higher margins, and yet another quarter of a lower outstanding share count. The company also reported solid new orders and a minor average selling price decline. I expect new orders to pick up in the last quarter if building permits manage to maintain current levels or rise even higher. From a valuation standpoint, I think the company is fairly valued at 17.8x next year's earnings. The company is currently struggling to break resistance, and I would not be surprised if the stock were to fall towards the $3,600-$3,700 area. As long as the economy refrains from falling further, I think these prices can be used as an entry.
The company has a tremendous track record, and I do not see enough evidence that could indicate a sudden end of the uptrend.
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