The first quarter was looking like it would be a challenging one for homebuilders. Coming into 2019, interest rates were at eight-year highs and there were clear signs that customers were getting more concerned with affordability. Despite these headwinds, NVR (NVR -1.70%) posted surprisingly resilient earnings in the first quarter, and it appears that 2019 could end up being better than expected.
Let's take a look at the company's most recent earnings results and why this report is especially encouraging for the rest of the year.
By the numbers
|Metric||Q1 2019||Q4 2018||Q1 2018|
|Revenue||$1.64 billion||$1.95 billion||$1.49 billion|
|Homebuilding operating income||$188.4 million||$255 million||$168.6 million|
|Net income||$188.4 million||$232.1 million||$166 million|
The homebuilding industry is a seasonal one, which means that home closings tend to be their weakest in the winter months. So it's not surprising to see such a sharp decline in revenue and earnings compared with the prior quarter. What is surprising, though, is that the company was able to post such an impressive increase in revenue and net income despite industry headwinds.
One reason that NVR was able to post such strong results compared with some of its competitors is that it has no presence in the California market. In Lennar's and KB Home's most recent earnings reports, they both reported that their West segments experienced notable slowdowns in units sold and average selling price. NVR's average selling price did decline slightly from this time last year -- from $387,000 to $365,000 -- but the declines were much more modest than what we saw with some other homebuilders in the quarter.
Also, as a result of the slightly lower sales and price numbers, homebuilding gross margins for the quarter slipped 20 basis points to 18.5%. Thankfully, though, NVR's mortgage banking business performed exceptionally well this past quarter and helped to offset some of that weakness.
NVR had seen net new orders decline year over year in the prior two quarters. This was the case yet again this past quarter, but it appears that the company was starting to stanch the bleeding. Net new orders were down only 1% in the most recent quarter and its net new orders (5,139) were well above settlements (4,493). Another encouraging sign is that the company's cancellation rate appears to be coming down. It's only one quarter, but NVR's 14% cancellation rate was a nice improvement over 17% in the fourth quarter.
For all of the encouraging signs this quarter that NVR is able to handle a less-certain market, it does appear that management sees a lot of opportunities to grow right now. For the second quarter in a row, the company's community count declined. Not adding communities suggests that management is expecting the housing market growth to slow down or potentially contract in the coming months. This is only speculation, though, and NVR's management doesn't issue press releases or investor presentations to let you know what it is thinking.
Paying a premium for performance
At 15 times earnings, NVR's shares are valued much higher than its peers. For years, though, the company has merited that premium because it has continually outperformed the industry with the best returns and its asset-light business model that allow it to maintain profitability through the ups and downs of the housing market.
This past quarter was another example of how the company is able to produce better-than-expected results in uncertain markets. It's likely why investors are willing to pay a premium for shares of NVR and why investors should consider it over any other homebuilder stock for their own portfolio.