NVR Inc Is an Undiscovered Gem in the Housing Sector
NVR Inc. (NYSE:NVR) is one of my favorite homebuilders in the United States. A lot of traders are not in this name; it is investable for the long-term with little volatility. It competes primarily with DR Horton (NYSE:DHI) in the home building space. Relative to the home builders index, that is the SPDR Series Trust Homebuilders ETF (NYSEARCA:XHB), NVR is the much better purchase. The SPD Series Homebuilders ETF is up just one percent in the last year, whereas DR Horton is up 11 percent, and NVR is up 17 percent.
Like DR Horton, the NVR has a substantial homebuilding segment, and also has a mortgage bank segment. NVR is engaged in the construction and sale of single-family detached homes, townhomes, and condominium buildings under the Ryan Homes, NVHomes, Fox Ridge Homes, and Heartland Homes trade names. The company markets its Ryan Homes and Fox Ridge Homes products to first-time and first-time move-up buyers. It markets NVHomes and Heartland Homes products to move-up and up-scale buyers. NVR primarily markets its products in Maryland, Virginia, West Virginia, Delaware, Washington, D.C, New Jersey, Pennsylvania, New York, Ohio, Indiana, and Illinois. It has some southern exposure in North Carolina, South Carolina, Tennessee, and Florida. It also offers various mortgage banking services to its homebuilding customers, including mortgage financing and title insurance brokerage, as well as performs title searches in connection with mortgage loan closings.
What is most impressive is the company’s performance, which has far outpaced DR Horton as well as the Homebuilder ETF’s average components. Income for its second-quarter was $68,178,000, or $15.17 per diluted share. Net income and diluted earnings per share for its quarter increased 34 percent and 50 percent, respectively, when compared to the 2013 second-quarter. That is incredible growth that should be catching everyone’s attention. Consolidated revenues for the second-quarter of 2014 totaled $1,102,054,000, a 9 percent increase from $1,009,892,000 for the comparable 2013 quarter. Looking at the first half of the year here in 2014, consolidated revenues were $1,913,364,000, 7 percent higher than the $1,780,148,000 reported for the same period of 2013. Net income for the year is $92,027,000, an increase of 7 percent when compared to the six months ended June 30, 2013. Diluted earnings per share was $20.19, an increase of 19 percent from $16.92 per diluted share for the comparable period of 2013.
But the company also has future growth. New orders in the quarter increased 4 percent to 3,415 units when compared to 3,278 units in the second-quarter of 2013. The cancellation rate in the second-quarter of 2014 was lower at 13 percent compared to 14 percent in the second-quarter of 2013. The Company’s backlog of homes sold but not settled decreased on a unit basis by 1 percent to 6,531 units, but increased on a dollar basis by 3 percent to $2,443,238,000 when compared to last year. Homebuilding revenues for the quarter totaled $1,084,080,000, 9 percent higher than the year earlier period. Gross profit margin was 18.6 percent compared to 15.9 percent in the second-quarter of 2013. Income before tax from the homebuilding segment totaled $102,578,000 in the 2014 second-quarter, an increase of 43 percent when compared to the second-quarter of 2013.
Turning to the mortgage side of the business, NVR had closed loan production of $675,625,000 in the quarter. This was 5 percent higher than the same period last year. Operating income for the mortgage banking operations during the second-quarter of 2014 decreased 27% to $6,246,000, when compared to $8,518,000 reported for the same period of 2013.
Overall, it was an incredible quarter. I have been a little sour on homebuilders of late given that housing just seems to limp along. I have been avoiding names like DR Horton and other competitors. But unlike the homebuilder ETF or DR Horton, I believe NVR is a solid buy. It has better growth potential, is well managed and is not a volatile stock controlled by traders. I recommend it as a buy in this space on pullbacks and assign a $1200 price target.
Disclosure: Christopher F. Davis holds no position in any stocks mentioned and has no intention of initiating a position in the next 72 hours. He has a buy rating on NVR Inc. and a $1200 price target.