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Is NVR's Stock a Bargain by the Numbers?

http://www.fool.com/investing/general/2011/03/07/is-nvrs-stock-a-bargain-by-the-numbers.aspx

Anand Chokkavelu, CFA
March 7, 2011

Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples.
  • The consistency of past earnings and cash flow.
  • How much growth we can expect.

Let's see what those numbers can tell us about how expensive or cheap NVR (NYSE: NVR  ) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

NVR has a P/E ratio of 21.3 and an EV/FCF ratio of 64.2 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, NVR has a P/E ratio of 15.5 and a five-year EV/FCF ratio of 8.3.

A one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.

NVR has a mixed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates. 

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

NVR 21.3 64.2 15.5 8.3
DR Horton (NYSE: DHI  ) 111.9 7.5 NM 4.2
PulteGroup (NYSE: PHM  ) NM 7.8 NM 6.8
Ryland Group (NYSE: RYL  ) NM NM NM 7.9

Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.

Numerically, we've seen how NVR's valuation rates on both an absolute and relative basis. Next, let's examine ...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earn