Homebuilder NVR Faces Challenge Topping 2013 Results


Like a lot of homebuilders, NVR delivered its best financial performance in years in 2013 as it benefited from an improving macro-environment and pent-up demand from buyers.

The challenge now is maintaining a robust growth pace this year asNVR ( NVR ) and other builders run up against tougher year-over-year comparisons and a couple of thorny industry issues, including the likelihood of higher mortgage interest rates.

NVR builds single-family homes, townhouses and condominiums in 16 states and the District of Columbia, mostly in the mid-Atlantic region. Its brands include Ryan Homes, NVHomes, Fox Ridge Homes and Heartland Homes.

Ryan Homes and Fox Ridge Homes are mainly marketed to first-time and first-time move-up buyers, while NVHomes and Heartland Homes target move-up and upscale buyers.

There were enough of those buyers around to help NVR grow its revenue 32% and EPS 56% in 2013. Both growth figures were the company's highest in at least eight years.

Help From Home Prices

NVR is unlikely to match those numbers this year. Analysts polled by Thomson Reuters expect the company to grow the top line 9% to $4.59 billion in 2014, and for earnings to rise 28% to 70.22 a share.

Although NVR might not see the same kind of robust sales growth in 2014, analysts say that its bottom line should still benefit from higher home prices and margins.

"Based on the growth in NVR's average backlog price, we expect gross margin growth of 190 basis points year-over-year in 2014, and we expect SG&A as a percentage of sales to be essentially flat," Jay McCanless, analyst at Sterne Agee, wrote in a fourth-quarter earnings report on NVR.

NVR reported Q4 results on Jan. 27. It logged an average closing price of $365,300 for the quarter, up 10.1% from the prior year and above McCanless' estimate for a 7.5% gain.

The company's unit backlog was in line with estimates at 4,946 homes. Average backlog prices climbed 7.8% year-over-year.

The rise in home prices helped offset flat home orders during the quarter and also contributed to a strong improvement in margins. NVR's gross margin came in at 19.5%, up 120 basis points from the prior year and 210 basis points from the third quarter.

JPMorgan analyst Michael Rehaut notes that NVR benefited from a "strong selling and pricing environment" as well as lower lumber prices.

Industrywide, home prices continue to show strength, though recent sales figures present a mixed picture.

According to the S&P/Case-Shiller home price index, released last month, the 20-city composite for November rose 13.7% year-over-year, the best gain since February 2006. Single-family homes have recorded year-over-year price gains for 18 straight months.

The index tracks prices on a three-month rolling average, so that November represents the three-month average of September, October and November prices. Data for December are due on Feb. 25.

But while rising home prices have bucked up margins and earnings at leading builders such as NVR,Lennar ( LEN ),D.R. Horton ( DHI ) andToll Bros. ( TOL ), they might also be weighing on recent home sales.

Housing Market Ahead

In January, the National Association of Realtors said signed contracts to purchase existing homes fell 8.7% in December, below views for an uptick of 0.3%. Signed contracts are considered an indicator of sales in January and February. These contracts are at their lowest level since October 2011.

Also in January, a Commerce Department report showed that U.S. sales of new homes fell in December for a second consecutive month. On the upside, sales for all of 2013 climbed to the highest level in five years.

NVR itself is expected to see a slowdown in orders in coming months.

Before the company's Q4 earnings report, analyst McCanless figured NVR could grow total orders by 28.6% year-over-year in 2014 and 14.2% in 2015, primarily on much higher per-community orders, which he likens to same-store sales growth. However, he later lowered his total order growth estimates to 9.3% for 2014 and 7% for 2015. This "reflects 5% same-store sales growth instead of our prior double-digit growth assumptions," McCanless said.

During the fourth quarter, NVR's unit orders rose 0.2%, much better than the 15% decline expected by McCanless and the 10% dip expected by Rehaut.

Profit Picture

Earnings for the quarter came in at $21.15 a share, up 77% from the prior year and well above consensus estimates for $16.26. Revenue gained 32% to $1.22 billion, topping views for $1.13 billion.

NVR also repurchased 127,000 shares for $119 million during the quarter.

"NVR reported a fairly solid quarter, particularly in terms of gross margins," Rehaut noted.

However, he added, "we view some of the gross margin improvement as possible 'catch up' to the industry average, as NVR had only 50 basis points of sequential expansion from Q1 2013 to Q3 2013, well below our universe average of 230 basis points."

Wall Street liked NVR's performance well enough. The company's stock price rose 5% to 1061 the day it reported Q4 results. Shares continued to rocket over the next week-and-a-half, setting an all-time closing high of 1,187.57 on Feb. 7. It currently trades near 1,161.

NVR was the first of a series of builders to report earnings. Its performance was matched by similarly strong results from several other builders, helping IBD's Building-Residential Commercial group climb about 11% since Jan. 24.

Analysts polled by Thomson Reuters expect NVR to report first-quarter profit of $10.15 a share, up 48% from a year earlier. They expect EPS growth of 62% during the second quarter, then 17% in the third quarter and 14% in the fourth.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: NVR , LEN , DHI , TOL

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