Inside Wall Street: A sturdy pillar in housing

Profitable US homebuilder NVR is a rarity in an ill-starred industry.

By Gene Marcial Jul 6, 2012 12:10PM

Image: Home under construction (© Corbis)A growth stock in the deeply depressed housing industry? It's true -- and as surprising as it is impressive. The stock is NVR (NVR), one of the largest U.S. homebuilders that's not only making money but is loaded with cash that exceeds the company's liabilities on its balance sheet.


That's the way it should be in any well-managed company but, obviously, not the norm in the struggling homebuilding industry.


Indeed, NVR is considered a growth stock partly because it has increased earnings by a steady 15% annually. It has a price-to-earnings ratio of 14 based on 2013 profits, and decent revenue numbers -- $2.75 billion in 2009, $3.05 billion in 2010, and $2.66 billion in 2011 -- despite the disastrous housing slump.


"This leading homebuilder has sailed through -- with positive profits, cash flow, and free cash flow -- in the worst depression any industry has experienced in modern times," says Stephen Leeb, president of Leeb Asset Management. The typical homebuilder, on the other hand, has either gone out of business or struggled mightily to survive, he adds.


NVR operates in 15 states, including Pennsylvania, New York, North Carolina, South Carolina, Ohio, Florida, and Tennessee. It builds and sells single-family detached homes, townhouses, and condominiums, and also offers mortgage banking services. The average selling price of an NVR home rose from about $296,400 in 2010 to $307,500 in 2011.


"NVR is well managed and doesn't engage significantly in large land acquisitions or building speculative homes without buyers," says Michael Souers of S&P Capital IQ. He expects the company to start acquiring more land and launch new home communities as the housing market recovers, which it has begun to do in recent months.


Although shares of NVR have been on a tear, many on Wall Street continue to be skeptical about the stock. It is currently trading at $840 a share, way up from $575 on Oct. 3, 2011. NVR has exceed most analysts' price targets.


In February, Morningstar Equity Research, a big bull on NVR, forecast that the stock would climb from $727, where it was then trading, to $800, based on its estimated intrinsic value. The stock closed Thursday at $859. Morningstar also envisioned an optimistic scenario where NVR would be worth more than $1,200. That was based on an estimated top-line growth of about 16% for the next four years. "This isn't out of the question," said Morningstar in its February report on NVR.


Some analysts totally missed the boat on NVR, including Guggenheim Securities, which tagged the stock a "sell" on April 26, 2012, when it was trading at $774. It had a price target then of $675, and warned decelerating new home sales might be "a negative catalyst."


Stephen Leeb notes that some analysts are missing the company's basic strength based on its consistent strategy. One aspect of that, says Leeb, is NVR's strict policy of avoiding speculative land acquisitions. And it insists on doing business only in locations where it is sure it can establish a commanding market position.


The housing depression and NVR's strong cash flow have permitted it to establish powerful beachheads in several new and potentially huge markets, such as Chicago, Indianapolis, Tampa, and Columbus, says Leeb. "Over the next five years, we expect profit growth of at least 20%."


NVR is one of the few profitable builders with "a conservative land acquisition program and favorable geography in the Mid-Atlantic region," says S&P's Souers. He notes that the consensus normalized earnings-per-share estimates from Capital IQ are $34.26 a share for 2012 and $50.04 for 2013.


Despite its positive attributes, NVR has not been billed on Wall Street as an exciting growth stock. But it has a good story to tell. "Sometimes if you look hard enough, you can find growth stocks in the least likely places," says Leeb.    


Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.



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