Bull of the Day: NVR (NVR)
NVR NVR is a homebuilder operating in 32 US metropolitan markets that is experiencing strong stock appreciation thanks to earnings upgrades, superior business economics, and housing supply tailwinds.
NVR utilizes a unique lot acquisition strategy, which limits risk in the cyclical housing market and improves Return on Equity (ROE). Additionally, the structural undersupply of housing in the US provides for an environment where NVR’s homes are a scarce product and thus in very high demand.
To the surprise of most analysts, homebuilder stocks have been on a tear this year and the Building Products – Home Builders industry currently sits in the top 2% of the Zacks Industry Rank. Over the last 10 years NVR stock has far outperformed the broad market, compounding at an annual rate of 20%.
NVR is up 29% YTD and still has bullish catalysts on the horizon. With strong earnings revisions, and a convincing technical chart pattern, NVR makes for a compelling investment.
Image Source: Zacks Investment Research
Earnings Revisions
NVR boasts a Zacks Rank #1 (Strong Buy), indicating upward trending earnings revisions. Although current quarter earnings estimates have been mixed, all other timeframes have seen significant upgrades. FY23 earnings have been boosted by 4% over the last two months, and FY24 earnings have been revised higher by 10%.
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Lot Acquisition Strategy
In contrast to many other homebuilders, NVR specializes in selling and constructing high-quality homes through a unique approach. Instead of owning and developing land, NVR focuses on acquiring finished building lots from third-party land developers at market prices.
This strategy minimizes the company's financial obligations and risks, as the legal obligation and potential economic loss are limited to the deposit amount in the event of failure. By avoiding direct land ownership and development, NVR gains operational efficiencies and a competitive advantage over its peers, enabling the company to deliver quality homes while mitigating the uncertainties associated with the cyclical nature of the industry.
This strategy decreases the capital intensity of the business and thus increases the Return on Equity. NVR’s ROE currently stands at 49%, which is much higher than the industry average of 21.3%.
Secular Trends in Housing
Amidst a dramatic surge in interest and mortgage rates in the past 18 months, initial expectations pointed towards a potential crash in the housing market. Surprisingly, the correction in housing prices remained modest, with only the most overheated markets experiencing notable markdowns.
The underlying reason for this resilience lies in the significant shortage of new housing supply. Even with a notable decrease in demand, the scarcity of available homes prevented a substantial correction in housing prices. The haunting memories of the early 2000s housing bubble have left a lasting impact on home developers, restraining the growth of new housing supply. While this scarcity poses challenges for homebuyers, it presents a promising opportunity for homebuilders like NVR and others in the industry, as their products are in high demand.
Image Source: National Association of Realtors
Technical Setup
The price action in NVR is very encouraging for the bulls. After finding support at pre-Covid highs late last year, the stock has rallied considerably. Over the last two months, NVR has built out a convincing bull flag, which it is in the midst of breaking out from.
Above the $5,900 level and the stock is going to be gunning for new all-time highs. Above that and there is no upside resistance. If the price reverses back below $5,900 then the pattern may need more time to develop, however below $5,600 and investors should be weary as the pattern will be invalidated.
Image Source: TradingView
Valuation
NVR is trading at a one-year forward earnings multiple of 14.3, which is below the market average of 20x, and below its 10-year median of 16x. The company also enjoys a stable balance sheet with a huge cash position of $2.8 billion, limiting the downside risk in the stock.
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Bottom Line
NVR currently demonstrates several promising factors that make it an attractive investment option. From a technical trade setup to a strong earnings revisions trend, investors can confidently consider NVR as a viable trade.
Moreover, NVR prioritizes its investors by actively returning cash. Over the past two decades, the company has demonstrated its commitment to shareholder value by reducing shares outstanding through significant share buybacks, amounting to a 66% reduction.
Adding to its appeal, with the Federal Reserve nearing the completion of its interest rate hiking cycle, prospective homebuyers can anticipate a downward trend in interest rates. This favorable development will effectively lower the cost of obtaining a mortgage and ultimately make homeownership more affordable.
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NVR, Inc. (NVR) : Free Stock Analysis Report
