NVR's Homebuilding Impresses, Higher Costs To Hurt Margins

On Jun 21, 2017, we issued an updated research report on NVR, Inc. (NYSE:NVR) , one of the country’s largest homebuilding and mortgage-banking companies.

The company’s solid business model, strong homebuilding operations and positive housing outlook make the stock even more attractive. However, rising costs, weak margins and rising interest rates might be dampeners.

Key Positives

The company is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings through two of its business segments, Homebuilding and Mortgage Banking.

Shares of NVR have rallied more than 48% year-to-date, beating the Zacks categorized Building-Residential/Commercial industry’s gain of 25.8%. The company is poised to gain traction in 2017 on the current positive housing scenario. Factors such as steady job and wage growth, a recovering economy, historically low interest/mortgage rates, rising rentals, rapidly increasing household formation, and a limited supply of inventory, point at continually strong demand in 2017.



This Zacks Rank #3 (Hold) company’s homebuilding segment (comprising 98% of the total revenue) has been performing well for the last few years as is expected to continue doing so this year and in 2018. Notably, NVR’s Homebuilding revenues increased 13% in 2016 from 2015, primarily on a 12% year-over-year increase in the number of settled units. The increase in the number of settled units was attributable to a 14% hike in backlog unit balance entering 2016 compared with 2015. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

The positive momentum continued in the first quarter of 2017, with the company reporting an 11% year-over-year increase in Homebuilding revenues. New orders in the quarter grew 7% and settlements rose 8% from the first quarter of 2016. Backlog of homes sold but not settled as of Mar 31, 2017 increased on a unit basis by 9% and 13% on a dollar basis compared with Mar 31, 2016.

NVR’s robust performance is largely attributable to its disciplined business model, focused on maximizing liquidity and minimizing risk. Unlike other homebuilders, NVR’s sole business is selling and building quality homes by typically acquiring finished building lots, without the risk of owning and developing land in a cyclical industry.

NVR’s 2017 EPS is projected to grow 24.8%, more than the industry’s average EPS growth of 17.3%. Meanwhile, the company’s sales growth in 2017 is projected to be about 10.6%, higher than the industry’s growth of 7.6%.

Headwinds

NVR’s results have been volatile for some time now despite the company’s reputation as one of the group’s consistently performing bellwethers. We believe the company’s margins will remain subdued throughout 2017, as its end markets are not likely to experience significant pricing power to offset cost inflation. NVR also expects continued gross margin pressure over the next several quarters due to higher cost.

Meanwhile, rising interest and mortgage rates, as well as land and labor shortages, raise concerns, as do rising material prices. At present, skilled labor shortages are a cause of concern for major homebuilders like NVR, D.R. Horton Inc. (NYSE:DHI) , Toll Brothers Inc. (NYSE:TOL) and PulteGroup Inc. (NYSE:PHM) . Labor shortages are resulting in higher wages while land prices are on the rise due to limited availability. There could be more inflation ahead as well. This is eating into homebuilders’ margins.

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