After a record 2020, this company is still firing on all cylinders in 2021. Strong earnings, improving fundamentals, macro tailwinds, and an undervalued stock price mean NVR Inc.
NVR Inc. has a very attractive risk/reward
I joined NVR Inc in April 2017. Long Idea and reiterated his view on the stock in November 2017, February 2019 and March 2020. Since my original report, the stock has outperformed the S&P 500 by over 43%. Despite the strong outperformance, NVR is undervalued and holds 56%+ upside.
Figure 1: Long Idea Performance: From the date of publication to 11/9/21
NVR reported earnings on October 21, 2021, but did not file its 3Q21 10-Q with the SEC until November 2, 2021. With the 10-Q in hand, I can analyze the firm’s updated financial position and set expectations for future profits. Increase (or decrease thereof) its current stock price.
What is working for the company
2020 was NVR’s most profitable year since 1998, as record demand for single-family homes drove revenue and profits. This success has continued through 2021, with net operating profit after tax (NOPAT) increasing over the trailing twelve months (TTM) to 37% above 2020 levels.
Homebuilding revenue was up 22% year-on-year (YoY) in 3Q21 and loan closed was up 17% YoY in the quarter as well. Overall revenue was up 20% YoY in 3Q21 and 29% YoY during the nine months ended September 30, 2021.
NVR has recorded record sales coupled with better profits. NVR’s NOPAT margin was 14.4% in 3Q21, 13.6% in 3Q20 and 12.4% in 3Q19. NVR’s NOPAT margin of 14.2% on TTM is the highest since at least 1998. NVR’s invested capital, a measure of balance sheet efficiency, increased from 2.7 in 2015 to 3.3 at TTM.
NVR’s return on invested capital (ROIC) increased from 21% in 2015 to 35% in 2020 and 47% on TTM due to increased operational and balance sheet efficiencies. According to Figure 2, NVR’s ROIC is the best among the five largest homebuilders (by total closings), which include DR Horton (DHI), Pultegroup.
Balance sheet efficiency and high ROIC are also a testament to NVR’s asset-light business model, which focuses on buying, owning and developing its own land, rather than multiple purchase agreements.
Figure 2: NVR profitability versus the next four largest US home builders: TTM
While NVR is a smaller builder relative to the “big three” of DR Horton (who I also like), Lenar Corporation and Pultegroup, it has steadily increased its share of the homebuilding market. In 2007Before the housing/economic crash, NVR was the ninth largest US homebuilder, with only a 3% market share based on total home closings. In 2021, NVR is the fourth largest US homebuilder with a 5% market share.
Going forward, NVR’s backlog of homes sold out but not closed as of September 30, 2021, remains strong. The number of units in the backlog remained flat YoY, but the dollar value of those units increased from $4.7 billion at the end of 3Q20 to $5.4 billion at the end of 3Q21, as the average selling price of a new NVR home increased by more than 15%. same time.
The industry’s strong growth in recent years is expected to continue for at least a few more years. Mortgage Bankers Association an estimate Single family housing starts at 1.13 million in 2021, increases to 1.16 million in 2022 and goes up to 1.21 million in 2023. JP Morgan
What is not working for the firm
While NVR sales are increasing year-on-year, the increase is due to higher home prices, not more homes being sold. New orders fell 22% YoY in 3Q21 and 3% YoY during the first nine months of 2021. While NVRs and other homebuilders have been able to pass on the increased costs on consumers (due to supply chain disruptions – see below), continued rise in home prices can drive potential buyers out of the market and weaken demand.
Supply chain disruptions have occurred as a result of increased manufacturing activity and the effects of COVID-19 on global transport of goods across the industry, Moreover, like many other industries, home construction is also facing labor constraints. NVR expects these issues to continue over the next several quarters, particularly as suppliers “continue to work through disruptions to meet increased demand.”
The risk of rising rates weighs heavily on buyers’ ability to buy new homes. whereas Average 30-Year Mortgage Rates Remaining historically low, they rose to 2.98% for the week ended November 10, 2021, up from a low of 2.65% in January 2021. The National Association of Realtors hope Rates to reach 3.5% by the middle of 2022, which will be the highest since the start of 2020 and could be a headwind for new home purchases.
The risk of driving demand for higher rates is mitigated by the fact that the United States does not have enough homes. Realtor.com an estimate There are 5.2 million homes in the US, an increase of 1.4 million from the decrease in 2019. Homebuilders will have to double their new home production pace to close the gap in five to six years. Such a huge need for new homes gives home builders enough runway for future development.
NVR price is to fall in permanent profit
At its current value, the NVR has a price-to-economic book value (PEBV) ratio of 0.8. This ratio means that the market expects NVR profits to drop by 20% permanently. That expectation seems pessimistic for a company that has grown NOPAT by 13% annually since 1998. Furthermore, the consensus estimates that NVR’s EPS will grow 43% year-on-year in 2021 and 21% year-on-year in 2022, a clear disconnect from expectations. stock price.
Below, I use my firm’s reverse DCF model to analyze expectations for future growth in cash flow baked into a couple of stock price scenarios for NVR Inc.
In the first scenario, I assume that the NVR:
- NOPAT margins fall to 7% from 2021 to 2030 (the lowest level since 2014, compared to 14% TTM and 11% 5-year average) and
- Revenue grows at 8% compounded annually from 2021 to 2030 (versus the consensus estimate of 24% in 2021 and 10% in 2022), then
The stock is valued at $5,149/share today – roughly equal to the current stock price. In this scenarioNVR’s NOPAT in 2030 is still below the company’s TTM NOPAT.
Shares can reach $8,098 or more: If I assume NVR:
- NOPAT margin fell to 11% (5-year average) from 2021 to 2030 and
- Consensus rates increase revenue in 2021 and 2022, and
- Revenue increases by 5% annually from 2023 – 2030, then
The stock is valued today at $8,098/share – 51% more than the current price. See the math behind this contrasting DCF scenario, For context, NVR has grown revenue by 8% compounded annually since 1998 and 9% compounded annually over the past five years. Additionally, this scenario assumes that the NVR increases NOPAT by 6% annually by 2030, which will be less than half of the NOPAT CAGR since 1998.
Should NVR maintain current margins or should revenue and profits grow faster than the upside, the stock is up even more.
Figure 3: Historical and implicit NOPAT of NVR: DCF valuation scenario
Disclosure: David Trainor, Kyle Guske II and Matt Schuler receive no compensation for writing about any specific stock, sector, genre or topic.