NVR’s growth has been muted due its exposure to the lagging Mid-Atlantic market. But the Northern Virginia-based builder’s second quarter 2015 saw improvement across the board.
NVR’s net income jumped from $68.2 million a year ago to $93.4 million in the second quarter. Gross profit margin jumped 60 basis points to 19.2%.
The gross margins, in particular, surprised J.P. Morgan’s Michael Rehaut, who projected margins at 17.5%.
“We believe the improvement was driven by a combination of operating leverage, modest pricing and mix; the company noted that the pricing environment overall remains not particularly strong and that it has not seen significant pricing power during the quarter,” Rehaut wrote. “Looking forward, we estimate 3Q15 gross margins of 18.0%, down 120 basis points sequentially and 100 basis points year over year. We also raise our 2015 and 2016 gross margin estimates to 18.1% and 18.7%, respectively, from 17.5% and 18.2%.”
Other analysts were impressed as well.
"NVR's gross margin expansion, up 60 basis points to 19.2%, bucked the trend of declining gross margins we have witnessed across the home building industry over the past several quarters," wrote Morningstar. "It stands to reason that NVR's gross margins have less to decline since they expanded far less than peers since 2011, but it remains surprising to see gross margins expand when land, labor, and (to a lesser extent) material prices are rising at the same time new-home sales price increases have decelerated. We expect flattish gross margins at 18.0% going forward."
NVR’s new orders jumped 11% to 3,796 units, while the average sales price of its new homes was $378,000 up 3%. Its cancellation rate of 14% jumped 100 basis points from last year. Its settlements jumped 8% to 3,175 units and its backlog increased 15% to 7,488 units.
"We believe the better sales pace will continue in the quarters ahead," Morningstar wrote. "Still, NVR may be somewhat growth constrained in the near term by the decrease in the number of selling communities."
Rehaut estimated third quarter order growth of 12%, driven by 14% absorption. Overall, he projects 14% order growth in 2015 and 12% order growth in 2016. The company had been repurchasing a large number of shares, but that declined in the second quarter.
“We believe NVR’s valuation is appropriate, as while the company demonstrated a strong track record during the downturn as well as continued to repurchase shares over the last few quarters, we point to our outlook for only moderate order growth and slowing share repurchases going forward as well as the company’s higher exposure to the weaker Washington D.C./Virginia markets,” Rehaut wrote.