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NVR Outpaces Industry in a Year: Factors Supporting the Rally

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NVR, Inc.’s (NVR - Free Report) shares have gained 5.2% over a year against the Zacks Building Products - Home Builders industry’s 1.6% fall. The company has been reaping benefits from robust demand for new homes, a disciplined business model, and strong orders and backlog. Also, a focus on maximizing liquidity and minimizing risks is likely to help NVR generate more returns for shareholders in the long term.

Impressively, NVR has also outperformed the Zacks Construction sector. Earnings estimates for 2022 have moved up 14.2% over the past 60 days. This positive trend signifies analysts’ bullish sentiments and justifies the company’s Zacks Rank #2 (Buy), indicating robust fundamentals and the expectation of outperformance in the near term.

Although the industry as a whole has been witnessing supply chain issues and inflationary pressure over the past year, homebuilders like Lennar Corporation (LEN - Free Report) , PulteGroup, Inc. (PHM - Free Report) , D.R. Horton, Inc. (DHI - Free Report) , and others have undertaken various price actions as well as cost-saving moves to combat these woes. These companies are currently observing price-cost neutrality, which will certainly reduce cost pressure on the bottom line.

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You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Driving Growth

Improved Housing Market: Lower mortgage rates have been driving the U.S. residential market over the past few months. Furthermore, demand for new single-family homes has seen a V-shaped recovery throughout the country, and NVR is not an exception. The rising work-from-home trend and fear of future interest rate hikes are prompting many families to choose new and spacious homes, thereby boosting demand.

Although the recent industry parameters that give a clear picture of housing market conditions are somewhat depressed, January’s solid job data and construction spending numbers are encouraging. (Read More: How the Construction Sector is Poised This Spring Season?)

Disciplined Business Model: NVR’s main business involves selling and building quality homes and acquiring finished building lots without the risk of owning and developing land in a cyclical industry. This business strategy is in sharp contrast to that of the other homebuilders.

The lot acquisition strategy helps the company avoid financial requirements and risks associated with direct land ownership and land development. This strategy allows it to gain efficiencies and a competitive edge over its peers. Lots controlled by the company at 2021-end increased 18.2% to 124,900 from 105,700 at 2020-end. These solid business fundamentals will continue to drive earnings in 2022.

Robust Orders & Backlog Level: NVR’s business has been witnessing strong orders owing to high demand, thanks to historically low mortgage interest rates and lower resale inventory levels. Additionally, more demand for affordable housing from multiple demographic groups has been driving order growth.

For 2021, new orders grew 12.9% in terms of value owing to pricing power. Year-end backlog was up 10.2% on a unit basis and 26.4% on a dollar basis to $5.78 billion from a year ago. Cancellation rate was 9% for 2021 compared with 15% in the year-ago period. Also, settlements were up 9% year over year to 21,540 units. Substantial recovery of the housing market scenario continued through 2021-end, as strong sales across all buyer groups had been observed.

Discussion of Above-Mentioned Stocks

Lennar: This well-known homebuilder is benefiting from effective cost control and focus on making its homebuilding platform more efficient, leading to higher operating leverage.

Lennar’s earnings for fiscal 2022 are expected to rise 10.9% year over year to $15.82 per share. The Zacks Consensus Estimate for fiscal 2022 earnings has improved from $15.60 per share in the past 60 days.

PulteGroup: This Atlanta-based homebuilder has been benefiting from a prudent land investment strategy, focus on entry-level buyers and returning more free cash flow to shareholders. PulteGroup’s annual land acquisition strategies have been resulting in improved volumes, revenues and profitability for quite some time now. The company has been reaping benefits from the successful execution of strategic initiatives to boost profitability, with a focus on entry-level homes.

The Zacks Consensus Estimate for its 2022 earnings has been upwardly revised in the past 30 days to $10.12 per share. Earnings for 2022 are expected to increase 38.6%.

D.R. Horton: This leading homebuilder currently sports a Zacks Rank #1. This Texas-based prime homebuilder continues to gain from industry-leading market share, a solid acquisition strategy, a well-stocked supply of land, lots, and homes along with affordable product offerings across multiple brands.

D.R. Horton’s earnings are expected to rise 38.5% year over year in fiscal 2022.


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PulteGroup, Inc. (PHM) - free report >>

Lennar Corporation (LEN) - free report >>

D.R. Horton, Inc. (DHI) - free report >>

NVR, Inc. (NVR) - free report >>