- Homebuilder equities have been beating the market for more than 6 months despite a weak housing market.
- NVR was named a top fundamental and technical pick at BofA.
- I see risks, but also more upside in the stock as it trades at low earnings multiples with impressive free cash flow.
While there are ongoing housing woes, homebuilder stocks have been in rally mode for many months. The SPDR S&P Homebuilders ETF (XHB) put in a low back in June and has moved higher on both a nominal and relative basis since then.
Homebuilders Building Relative Gains
BofA likes the space right now, and at the turn of the year, their research group made NVR its top pick in the industry. The sellside analysts see lower lumber prices eventually flowing through to earnings while new orders should remain resilient compared to their peers given their regional positioning. Downside risks include a poor core market, reduced margins due to a drop in finished lot availability, and a continued high trend of interest rates.
According to Bank of America Global Research, NVR, Inc (NYSE:NVR) is a top-5 US homebuilder based on deliveries. It operates in four geographic segments, building homes catering to entry-level and move-up buyers. The company is positioned in 34 markets in 14 states, and primarily builds single-family detached homes. NVR also operates a mortgage and title insurance business. The company's fiscal year ends on December 31.
The Virginia-based $15.2 billion market cap Household Durables industry company within the Consumer Discretionary sector trades at a low 10.8 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal.
On valuation, analysts at BofA see earnings having risen by nearly 50% in 2022 but then falling in 2023 and 2024, but those were numbers as of the middle of last year. BofA notes that the firm should trade at 5.2x 2023 book value, a sharp discount from where it sells now. I see forward earnings multiples in the low teens which is attractive, but earnings volatility could be high given the uncertain macro landscape.
What’s stable though is NVR’s free cash flow, which could raise the chance of a dividend in the coming quarters if we get some sense of tranquility emerging in real estate and housing. Overall, I like the valuation despite near-term earnings risks.
NVR: Earnings, Valuation, Free Cash Flow Forecasts
Looking ahead, corporate event data from Wall Street Horizon show an unconfirmed Q4 2022 earnings date of Tuesday, January 31. The calendar is light on volatility catalysts aside from the earnings date.
Corporate Event Calendar
The Technical Take
The 5-year chart of NVR tells a true story. Notice in the chart below that shares managed to find support around the pre-pandemic highs near $4000. While undercutting the February 2020 peak by more than 10%, as well as dropping below its late 2020 range-lows of $3800 and change, stops may have been cleared out this past June. What I like is that the shares successfully tested those lows back in October when the broad market was notching new 2022 lows. That pullback was completed, and NVR recently hit fresh highs dating back to early last year.
Now I see the next resistance spot in the $5300 to $5400 range and the currently negatively sloped 200-day moving average should turn positive before long, indicating a change in the stock’s long-term trend. I see near-term support in the $4500 to $4700 range. Long here with a stop under $4150 is a strong risk/reward play.
NVR: Base Built, Now Awaiting Higher Prices
Steve Suttmeier at BofA has a bit of a different view of the chart, but a similar bullish conclusion: “NVR has broken out from a 2022 bottom that favors upside to 5620 with the late 2021 peak near 5982. This bullish setup remains in place if support from 4453 to 4321 (breakout neckline and 13, 26, and 40-week MAs) holds. The rising 200-week MA offers additional support near 4173.”
BofA's Technical Opinion on NVR
The Bottom Line
While I am not as cheery about NVR compared to BofA, I do like the valuation and technical setup. I would not call this my ‘top pick,’ but the fundamentals could go from bad to less bad this year which would mean significant gains to come.
This article was written by
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