What's that tired phrase when it comes to real estate? Location, location, location. Luckily for homebuilder NVR (NYSE: NVR), the hot housing markets are headed back East into NVR's wheelhouse. Those trends are a large reason for the company's better-than-expected second-quarter results.
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Here's a brief look at NVR's most recent earnings report, and where NVR stands in the world of homebuilding today.
By the numbers
|Metric||Q2 2017||Q1 2017||Q2 2016|
|Revenue||$1.547 billion||$1.279 billion||$1.390 billion|
|Net income||$147.9 million||$102.9 million||$91.7 million|
2017 is proving to be a good time to be a homebuilder, and NVR's most recent results are a testament to that. In the second quarter, revenue from homebuilding increased 11%, thanks entirely to more new orders and settlements. The average selling price per home decreased 2% to $377,000. That sounds worse on the surface than the reality, though; most of that decline is due to management shifting its attention down-market.
This is likely a trend we will see over the next few years in the homebuilding industry. There is a large opportunity to sell to first-time buyers. Many in the 25-to-35 age cohort that has put off homebuying are starting to enter the market, but the supply of homes for this group is tight. Couple that with steady economic growth, low unemployment, rising wages, and low (but possibly rising) interest rates, and you get a great market for new-home sales.
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What is even more encouraging about these results is that despite the decline in average home price, NVR was able to increase its gross profit margin to 19.5%. That puts the company right in the middle of the range among its peers. On the net income margin, though, it does much better thanks to its low overhead costs. This past quarter, SG&A (selling, general, and administrative) expenses were only 6.5% of revenue, while interest expenses were only 0.3%.
One thing that could be considered a negative in these results is the tepid growth in its largest market: New orders in its Mid-Atlantic segment -- which accounted for 48% of new orders -- were up only 1% compared to this time last year. Almost all of the growth the company saw this past quarter was from its Southeast and Mideast segments. That isn't too surprising, though, since those two segments contain two states with the fastest-growing real estate markets in the U.S. today -- Tennessee and Florida. As long as these markets remain red-hot, concerns around growth elsewhere can be forgiven.
As has been the case for several quarters, NVR's management kept up its share buybacks. So far in 2017, NVR has repurchased $159 million in shares, reducing basic shares outstanding by 83,000 shares. Management still has another $140 million it can use under its current buyback authorization; if the company continues to post results like this, don't be surprised if that gets used up soon.
What a Fool believes
NVR is a much more conservatively run homebuilder than its peers. It doesn't own or develop land, but focuses on building homes. It also has almost no net debt thanks to a decent-sized cash pile.
This was the kind of stock you'd have wanted to own back in 2007 when the housing market was about to collapse. Sure the business would suffer, but it would live to see another day. Today, the company's growth will likely be a bit slower than its peers, because of its high concentration in the Mid-Atlantic states and its aversion to adding leverage.
If the company can maintain its high rate of share repurchases, though, then EPS growth could be just as strong as other homebuilders', using organic growth to boost shareholder returns. With the housing market on the upswing, NVR is a stock I'll certainly be watching in the coming quarters.
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