NVR, Inc.: A Housing Stock? Now?

NVR, Inc. (NVR) operates as a homebuilder in the United States. It engages in the construction and sale of single-family detached homes, town homes, and condominiums. The company sells homes under the Ryan Homes, NVHomes, Fox Ridge Homes, and Rymarc Homes trade names primarily to first-time homeowners and first-time move-up buyers.

It markets its products in Maryland, Virginia, West Virginia, Pennsylvania, New York, North Carolina, South Carolina, Ohio, New Jersey, Delaware, and Kentucky. The company also offers mortgage banking services to its homebuilding customers, including broker title insurance; and performs title searches in connection with mortgage loan closings. The company was founded in 1979. It was formerly known as NVHomes, Inc. and changed its name to NVR, Inc.

So why look at a homebuilder now when that sector is only a little more popular than Osama bin Laden? Because demographics will eventually make this company valuable again. Yes, we're in a mess at the moment, but like everything else, housing goes in cycles. When the cycle turns again, this homebuilder will be one of the first to benefit.

That's because its market niche is first-time buyers as well as first-time move up buyers, the segment of the population that keeps growing, either from generation Y or from newly immigrated citizens. These people need places to live. While many of them are renting, the large majority would like to own a home. They're saving money. They're going to buy a home as soon as they are psychologically and monetarily ready.

It's the first part that will be hardest. The mentality of home buyers now is simple: don't buy, prices will go down. They're right for the moment. But when that perception changes, NVR will have a house waiting for them.

Consider this: Last year, NVR reported a profit of $54.14 a share, not a loss as so many other builders did. This year, analysts think earnings per share will be $36.88 (that's a profit, not a loss) and next year, eps will bounce to $61.66. Granted there is only one analyst forecasting next year's number, so it's not like there's a large following in this stock. There are 2 analysts predicting this year's level. For the quarter (ending in June), eps estimates are for $9.36 and for the September quarter $10.23.

No question, NVR is feeling the slump. Sales for the first quarter were down 19%. But it is selling homes, even though they have lower price tags (on average 14% lower). New orders are slowing, 30% below last year at this time. The backlog, measured by dollar value, is down 37% from last year at this time. Total sales in 2007 were $5.048 billion, down from $6.036 billion in 2006. This year, analsyts see $3.8 billion on average (range is $3.58 to $4.20) and next year $3.54 billion (range of $2.91 billion to $4.23 billion) with 3 analysts in the survey.

Cash flow continues strong enough for the company to buy back its stock. At the end of March, there was almost $770 million in cash sitting in the treasury. There are 5.277 million shares outstanding. The repurchase program will help bolster the bottom line.

Other numbers: Return on Equity stands out at 24% (for the trailing twelve months). At the end of 2007, it was 29.6%, down from 51% in 2006. The trailing P/E is 10.2 and the forward P/E is 8. Price to sales is .55. Book Value is $232. There is no dividend. The price range for the stock in the last 52 weeks has been $398.96 to $728.45.

Investors don't buy NVR for immediate returns. The housing market will stay mired in its current malaise for some time. No one knows for how long. But long term investors may want to dig into NVR with an eye on the future, when the housing market returns to normal. The company will make very good money in a positive market. It doesn't need a robust revival. That's because first-time buyers are just waiting to make their move. It's only a matter of time.

Disclosure: none