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Morningstar | NVR's 2Q Results Beat Consensus Expectations; Solid New Order Growth Points to Firming Demand. See Updated Analyst Note from 19 Jul 2019

NVR reported solid second-quarter results that topped consensus revenue and earnings expectations. Total revenue grew 1% year over year to $1.8 billion (3% above the consensus estimate) and diluted EPS grew 8% to $53.09 (versus the consensus $44.87).

NVR's new orders, which grew almost 6% year over year, were the highlight of the no-moat rated homebuilder's second quarter. While the average selling price of new orders fell almost 5% to $358,600, we believe this decline is mostly due to a continued mix shift to lower price homes and housing markets. Indeed, orders from NVR's South-East and Mid-East regions represented almost 49% of orders during the quarter compared with 44% last year. Last quarter, South-East and Mid-East orders had ASPs 18% and 13% below the company average, respectively. Operating margins among NVR's four reported regions are similar (between 11% to 12% in 2018).

In our first-quarter analyst note, we expressed concern that NVR's low community count (relative to recent years) could hinder new order growth. However, the firm materially increased its community count during the quarter to 470 average communities from 449 last quarter (a 5% increase). Given that NVR continues to increase its lot count (up 8% year over year and 3% sequentially to 101,400 lots), we expect NVR's community count to grow over the coming years. Sometimes, a growing community count can mask weakening underlying demand (total orders increase while orders per community decline), but this was not the case for NVR. During the second quarter, NVR signed 11.1 orders per community compared with 10.3 last year (an 8% increase). Overall, we think NVR's solid order activity is a sign of improving demand for new homes, and we remain optimistic that this trend can continue.

We increased our fair value estimate 3% to $2,460 per share to reflect our more optimistic near-term revenue growth outlook as NVR's first-half home deliveries and new orders came in better than we had expected.

NVR's 8% EPS growth was a function of a 1% increase in pretax income, a 180-basis-point lower effective tax rate, and a 4% decrease in diluted share count compared with the year-ago quarter. Despite well-known cost challenges for the homebuilding industry, NVR's second-quarter gross profit margin was quite resilient, declining only 20 basis points year over year and improving 40 basis points sequentially to 18.9%. NVR's homebuilding selling, general, and administrative expenses as a percentage of sales ticked up 30 basis points to 6.4%. The firm's homebuilding pretax margin contracted 30 basis points to 12.5%.