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Why NVR's Stock Is Lower, Even After Its Q4 2019 Earnings Beat

By John Bromels - Jan 30, 2020 at 7:48AM

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Despite solid performance, the homebuilder has been underperforming in 2020.

If you want a housing industry success story of the last five years, look no further than homebuilder NVR (NVR -1.20%) Its stock has outperformed most of its peers, rocketing up 217% in the last half-decade.

But you wouldn't know it to look at the company's performance so far in 2020. Year to date, shares are only up 1.9%, compared with the S&P 1500 Homebuilding Index's gain of 13.1%. The company's fourth-quarter 2019 and full-year results, released on Jan. 28th, didn't help. A slight gain upon the release had been more than wiped out just a day later.

This doesn't seem to be directly related to the company's performance, though. Here's what investors need to know.

A home with a "For Sale" sign out front

NVR has been a top performer in the housing industry, but the stock market hasn't been as kind to it this year. Image source: Getty Images.

By the numbers

Metric Q4 2019 Q3 2019 Q4 2018 YOY* % Change 
Revenue $2.0 billion $1.9 billion $2.0 billion Flat
Net Income $256.1 million $223.8 million $232.2 million 10.3%
Earnings Per Share $64.41 $56.11 $58.57 10%
New Orders 4,392 4,766 3,841 14.3%
Settlements 5,331 5,124 5,186 2.8%

YOY = Year-Over-Year. Data source: NVR, Inc. earnings releases. Chart by author.

Although many homebuilders see a sequential slump in orders, closings, and net income in the October-December quarter, that wasn't the case for NVR, which saw sequential increases in closings (referred to by the company as "settlements") and earnings. All three metrics improved over the prior-year quarter.

For the year, the picture was similarly healthy: Revenue was up 3% over 2018, net income increased by 10%, and earnings per share rose 14%. 

Perhaps the only area of concern was the average price of the homes closed during the quarter and the year, which dropped slightly in most of the company's markets:

Bar chart of NVR average unit prices by region

Data source: NVR, Inc. Q4 2019 earnings release. Data refers only to units settled during time period as opposed to new orders. Chart by author.

Except in the Southeast -- where average home prices have risen sharply over the past year -- prices in this quarter (orange bars) and this year (yellow bars) are lower than the year-ago period. In spite of this, though, the company has been able to grow earnings, so investors shouldn't be too concerned unless the trend accelerates sharply.

Similarly, the company's mortgage banking business grew year over year.

The expectations game

NVR is a notoriously tight-lipped company. Its news releases are limited to announcements of results and share repurchases, with no quotes or management commentary. The company doesn't offer shareholder presentations or earnings conference calls, and never issues guidance. 

Investors should keep that in mind when evaluating the market's expectations for this company and analysts' consensus on what earnings will be. However, in this case, analysts' expectations were for quarterly earnings roughly flat from the year-ago quarter, as opposed to a 10% increase. Normally, that kind of outperformance would send shares higher. Here, despite solid performance and an upbeat outlook to the housing market, shares are down, underperforming peer companies' shares as they have so far this year.

One possibility is that investors think NVR is overvalued. Certainly, its valuation of 17.6 times earnings is much higher than most of its peers'. NVR's stock had a healthy run in 2019, rising 56.3%, although the entire industry had a good year in 2019. Investors may also be looking at how other companies are faring -- lots of homebuilders are reporting earnings in the last week of January -- and are selling off NVR's stock based on what they see.

Certainly, NVR's quarterly growth pales in comparison to that of D.R. Horton (DRH 0.00%), which saw a net gain in its share price. Other companies' performances have been more tepid, which may be leading investors to rethink their bullishness on the residential real estate market. 

In any case, despite its consistently high valuation, NVR seems to be executing well in an upbeat market environment. Now, investors just have to hope that environment sticks around as long as possible.

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