EUR 850.00 For Business Accounts Only

Morningstar | NVR Reported Solid 2Q Results, hut Specter of Slowing Growth Spooked Investors

NVR's share price declined 8% on July 20 after the no-moat homebuilder reported its second-quarter results. We believe the firm's revenue miss and decelerating new order growth contributed to the sell-off. Total revenue of $1.79 billion increased nearly 16% year over year, but missed the consensus estimate by about $34 million. On top of that, new orders, a leading indicator of demand for NVR's homes, grew only about 6% year over year this quarter after posting 17% year-over-year growth in the first quarter of 2018, 18% year-over-year growth in the fourth quarter of 2017, and 21% year-over-year growth in the third-quarter of 2017. In our view, the small revenue miss was benign, and based on our analysis, we believe the decelerating new order growth is a function of fewer selling communities rather than slowing demand. NVR was selling out of 480 communities on average this quarter, down from 491 communities during the year-ago quarter. However, its monthly absorption rate (new orders/average community count/3) increased to 3.5 orders per community per month from 3.2 during the second-quarter of 2017, which tells us demand for the company's homes is stronger than it was last year. We think NVR's lower community count is probably the result of communities closing out faster than they can be replaced. However, the firm has plenty of controlled land (94,200 lots versus 83,700 lots at the end of the year-ago quarter), so we expect it to use its land position to build its community count.

After reviewing NVR's second-quarter results, we expect to lower our fair value estimate by about 4% due to our upward-revised ending diluted share count assumption for 2018. Overall though, we thought the firm's second-quarter performance was quite solid. While homebuilding gross margin declined 40 basis points year over year to 19.1%, homebuilding operating margin expanded 10 basis points to 13.1% due to strong selling, general, and expense leverage.

Indeed, NVR's homebuilding revenue grew twice as fast as selling, general, and administrative expense during the quarter (16% revenue growth versus 8% SG&A growth). Based on our calculations, NVR will need to maintain a 19.1% gross margin through the rest of 2018 to realize a full-year gross margin of 19%. But even if the firm comes up a bit short, which wouldn't be surprising given rising land, labor, and material costs, its 2018 gross margin should still be above the cycle average (its average full-year gross margin since the 2009 housing trough has been 18%).

As we noted above, NVR's new order growth appears to be quite strong after adjusting for community count. Furthermore, its current backlog value (approximately $3.9 billion) is about 12% higher than it was at the end of second-quarter 2017. As such, we still expect NVR to deliver low-teens homebuilding revenue growth in 2018.