The concern of a housing slowdown has not hit NVR's (NYSE:NVR) earnings results...yet. This past quarter, the homebuilder posted another strong revenue and earnings result that blew past Wall Street expectations.
Before investors stick their tongues out at analysts for underestimating NVR's ability to generate returns in this business, though, there were some signs that the company's results may start looking less robust in the quarters to come. Let's take a look at NVR's most recent earnings results and which operating numbers suggest that investors may want to brace for a period of weakness.
By the numbers
|Metric||Q4 2018||Q3 2018||Q4 2017|
|Revenue||$1.95 billion||$1.81 billion||$1.78 billion|
|Homebuilding operating income||$255.0 million||$224.2 million||$241.8 million|
|Net income||$232.1 million||$195.8 million||$124.6 million|
One of the things to remember when looking at homebuilder earnings is that sales numbers are more reflective of the sales environment from a couple of quarters ago than the current one. This past quarter, we saw the company post impressive revenue numbers thanks to a 12% increase in settlements (or what some others in the industry call homes closed).
While gross margins declined slightly to 18.6%, the company was still able to post impressive net income and earnings-per-share results thanks in large part to management's plan to consistently buy back shares and lower its share outstanding count. In 2018, it repurchased about $800 million worth of its shares, which reduced its share count by 3%.
The numbers in this most recent report that are less encouraging are the drop in net new orders and the declining backlog. These results are more reflective of the sales environment this most recent quarter, and they don't look nearly as promising as they have in recent years.
For the quarter, NVR reported 3,841 net new orders, a decline of 13.1% compared to this time last year, the second consecutive quarter in which net new orders were down by double digits. Also, it reported that its cancellation rate ticked up from 14% last year to 17% in the most recent quarter. On top of it all, the average selling price of those net new orders was down 1.3%.
All of these signs point to sales slowing down in 2019, which shouldn't be too much of a surprise considering there has been talk of a housing slowdown for several months. The good news is that NVR is still working off of a $3.15 billion backlog for the year, which will help cushion revenue should net new orders continue to slide.
Management bracing for a slowdown?
One thing that NVR's management has done well over the years is maintain investor returns through the best and worst times this industry has faced. It's no surprise that it was the only one to remain profitable through the housing collapse a decade ago.
While management is tight-lipped about its plans -- it doesn't issue earnings statements or do conference calls -- one thing that stands out is that NVR has a lower community count and a lower number of unsold lots and housing units on the books. A single quarter doesn't make a trend, but a lower community count could be a sign that management doesn't think trying to grow in a slowing market is the most efficient use of capital. This is a minor detail worth watching in the coming quarters to see if management continues to allow its active community count to decline or if this was a one-time aberration.