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Morningstar | NVR's Strong 1Q Points to an Improving Housing Market, but Community Count Could Be a Headwind

NVR's stock traded up 6% on April 22 after the no-moat-rated homebuilder reported strong first-quarter results that featured a 15% year-over-year increase in home deliveries and a 7% increase in new orders per community. Total homebuilding revenue increased approximately 10% year over year to $1.6 billion as the 15% increase in deliveries was partially offset by nearly a 4.5% decline in average selling price to $365,700 per home. Homebuilding pre-tax margin expanded 15 basis points to 11.5% as a 15-basis point decline in gross margin to 18.5% was offset by better selling, general, and administrative expense leverage and almost a $4 million increase in other income. Mortgage banking earnings grew a robust 35% year over year to $30 million due to 11% revenue growth and significantly better profitability. NVR's strong earnings growth across its homebuilding and mortgage banking operations and 7% decrease in its diluted share count resulted in a 21% increase in EPS to $47.64. After reviewing NVR's first-quarter results, we don't expect to materially change our fair value estimate.

At first glance, NVR's headline new order volume, which declined approximately 1% year over year, is deceiving. However, when we dig into the details, we think NVR's first-quarter order data suggests an improving housing market. New order growth must be compared with community count growth to get a more accurate picture of demand. NVR's 1% decline in new orders was quite impressive considering the firm's average community count declined over 7% year over year. On a per-community basis, NVR signed 11.4 new contracts per community during the quarter versus 10.7 last year. However, even if the housing market strengthens throughout 2019, NVR could struggle to grow new orders unless it can increase its active community count. That said, NVR controls 98,300 lots, which is near all-time highs, so the firm is not lacking land, and we expect community count to grow over the coming years.

While the 3% decline in new order ASP could be the result of increased incentives, we think a geographic shift to lower-price markets was likely the main driver. Indeed, NVR's lowest-priced South East market ($294,800 ASP in 2018 versus the company average of $379,700) accounted for 23% of orders during the first quarter versus about 19% last year. NVR's other three geographic markets lost new order share relative to the South East.