NVR yesterday reported earnings for its second quarter, ending June 30, of $50.7 million, or $10.11 per share, an increase of 8% and 13%, respectively, when compared to the 2012 second quarter. Consolidated revenues for the second quarter of 2013 totaled $1,009,892,000, a 31% increase from $769,783,000 for the comparable 2012 quarter.
Analysts' consensus prior to the earnings announcement was for an EPS of $11.94 vs. the actual $10.11. Factoring in a one-time charge for a "water intrusion" issue in one of its communities, costing $15.6 million, the EPS would have been $12.03.
Positives include NVR's community count growth, which drove higher than expected revenues, as well as a price-over-pace metering that over-delivered on revenue even as it missed on unit volume.
Negatives focus on the fact that NVR's best-of-breed margin management has less wiggle room than that of its peers, and therefore, will improve less relative to other home builders. The other big challenge for NVR is geography, where land for lots is more constrained and more frothy, well ahead of where household and employment economic fundamentals are driving demand.
As strong an operator as NVR may be, trading on asymmetry between what it pays for lots and what it can sell them for will be a game of patience and opportunism. Big money is pushing land prices up. Eventually that should bring more land sellers into the market to ease supply constraints, similar to housing inventories. NVR's deep relationships with land developers and sellers should play out in unit volume, orders, and greater scalability as more lot inventory comes to market in the next 12 to 24 months.
Few operators play the upward and downward trajectories of a cycle as ably as NVR does.
Here's some take-away lines from a few of the analysts that follow NVR:
Stephen East, ISI Housing Research: The Gross Margin was 17.5% in the quarter, excluding the water intrusion charge of $15.6M. We expect the margin remains mired in a rut until pricing power resumes in its core Northeast and Mid-Atlantic regions and the land market becomes less competitive given the company's "asset light" strategy. More likely than not, NVR will not see relief on the land front until land developer inventory catches up with builder demand. Given the dearth of developer financing, this could prove a protracted process versus prior cycles. Beating only KBH, NVR has the 2nd lowest absolute Gross Margin of the builders we have under coverage. Moreover, we forecast a limited 12 basis point improvement in FY'13 and a 31 basis point improvement for FY'14, which compares unfavorably to the 162 and 91 basis point improvements respectively, we project for the group.
Michael Rehaut, JP Morgan: Importantly, while the recent rise in mortgage rates has not had a “huge” effect on order trends, at the same time, NVR noted that it has felt “some” impact, as not only were some buyers that could still afford to purchase delaying decisions, but also other potential buyers for its first-time product were priced out of the market. Nonetheless, we note that 2Q orders still grew 25% YOY, modestly above our 21%E, driven by sales per community per quarter of 7.3, up 12% YOY, roughly in line with our 7.2 estimate, or up 11%, while community count rose to 452, up 12% YOY and versus our 440 estimate, or up 9% YOY. Additionally, order ASPs improved to $361K, up 5% and 9% sequentially and YOY, respectively.
Adam Rudiger, Wells Fargo: 1) Demand: Orders grew a healthy 25% yr/yr, although community count growth added approx. half of the improvement. While NVR’s orders/community growth has lagged peers somewhat, we attribute it partly to geography. Additionally, NVR’s 2.5 orders/community/month exceeded the company’s 10-year Q2 average 2.4, suggesting orders are running at a somewhat normal pace, although in 2003-2005 the metric averaged 3.1. As per our discussion with management, we believe higher mortgage rates may have marginally impacted demand in the second half of the quarter. Although the impact is difficult to quantify, some buyers may become priced out from higher rates while for move-up and discretionary buyers, the rate effect may have simply delayed contract signing rather than lead to a more permanent order loss. 2) Gross Margins: NVR saw the expected seasonal lift in gross margin, but the uptick was lower than we expected, despite strong closing price increases. We believe higher input costs may be to blame for the shortfall. Commodity wood prices have pulled back substantially in recent months, but the gross margin benefit won’t likely appear until at least Q4 due to the timing lag between wood purchases and home closings (4-6 months). 3) Buybacks: NVR used nearly $300MM to repurchase shares, leading to a 6% sequential decrease in quarter-ending actual share count. We view NVR’s return of cash to shareholders as one of its more attractive traits and a key differentiator with public peers.