Why I Like This Homebuilder -- Even in the Struggling Housing Market

You might not be feeling too upbeat about the housing sector, but you cannot afford to ignore this homebuilder.

NVR (NYSE: NVR  ) , one of the largest homebuilders, managed to notch higher sales in its third quarter, but couldn't go beyond a flat bottom line. OK, so what's good about that?

Well, there are some really interesting things about NVR and its numbers that are worth knowing before tossing the company aside as another poor homebuilder.

Lots to cheer
It seems like homebuyers are finally putting the sweet memories of the first-time homebuyer tax credit behind and plodding back to shop. What else can be the reason behind NVR's 5% rise in third-quarter revenues when its first and second quarters saw miserable sales drops of 13% and 28% year over year, respectively?

Higher orders are a good indication of buyers coming in. NVR's new home orders rose 3%, and settlements were 6% higher from the year-ago quarter. Note how peers are also reporting a flow of orders.

During the most recent quarter, Beazer Homes' (NYSE: BZH  ) orders rose a good 33%, while Standard Pacific (NYSE: SPF  ) saw 6% rise in orders in its last reported quarter. KB Home's (NYSE: KBH  ) third-quarter orders were up by an astonishing 40%. Things are getting interesting in this sector, for sure.

And there's more to cheer as far as NVR's numbers are concerned. Its cancellation rate dropped to 15% from 17.9% a year ago. Backlogs -- a crucial indicator of future revenues -- also went up by 3% in the last quarter. Like orders, backlogs are rising across the board. Lennar's (NYSE: LEN  ) third-quarter backlogs were up by 11%, while Pulte Group's (NYSE: PHM  ) backlogs were up by 2% in its second quarter.

If everything was so good, where was the drag?
NVR's mortgage banking segment has been a drag on its margins. Loan production fell 2%, pulling the segment's operating income down by 34%. It looks like tighter credit requirements are putting pressure on this segment.  This sharp drop was why NVR's bottom line remained flat at $43.4 million in spite of its homebuilding segment doing well.

Dodging pitfalls
An interesting factor that helped NVR stay above water during the slowdown and also sets it apart from peers is its less-land policy. NVR has tried to keep itself insulated from land-related volatility issues by avoiding buying land upfront.

However, some months back, NVR deviated by agreeing to buy a big land portfolio in its most focused Washington, D.C. metro area. How well this will work for NVR is yet to be seen, since this region might also be slowing down a bit.

The Foolish bottom line
I'm really glad to see NVR's homebuilding segment doing well. I've mentioned before how strong this company's balance sheet is. NVR has also been aggressively repurchasing shares, creating a lot of shareholder value.

The housing markets may also be showing early signs of recovering. And in such a case, I do not hesitate to say that once things really start building up in the sector, NVR could be the best bet around.

Make sure you keep watching NVR. Click here to add it to your stock Watchlist.

Fool contributor Neha Chamaria does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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