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NVR earnings disappoint

NVR revenueEnlarge GraphNVR reported sales that fell below expectations for Q113

NVR is a homebuilder / mortgage originator based in Reston, VA. They build homes under the Ryan Homes, NVHomes, Fox Ridge Homes, and Heartland Homes trade names. They are primarily East-Coast based, with divisions in the Mid Atlantic, Northeast, Mid East, and South East.

NVR stock fell about 2.2% today on the back of a disappointing earnings report. Sales came in at $770MM, which was well short of the consensus $843MM expectation. While sales did increase 28% year-over-year, that was well below what competitors like KB Homes (KBH) reported. KB has a November fiscal year and reported sales up 59%. The earnings per share number was $6.84, well below the consensus estimate of $7.86. They did not hold a conference call.

Other indicators

Orders received were up 11%, while backlog was up 39% on a dollar basis and 27% on a per-unit basis. Cancellation rates increased to 13.2% year-over year.  Average selling prices were up 8.5% and margins widened by 80 basis points. NVR has a mortgage origination business, which closed production of $473 million for the quarter, up 13% over last year. Operating income in the mortgage segment increased as well.

Location matters

While NVR is headquartered in the red-hot Washington DC market, the rest of its markets are concentrated on the more tepid East coast markets. This explains some of the divergence between NVR and KB Homes.  KB is a West Coast-centric builder and has more exposure to the hot markets in California, Phoenix, and Las Vegas. The difference between the different locations is primarily driven by foreclosure laws. The East Coast (particularly in the Northeast) require a judge to approve a foreclosure. This has elongated foreclosure timelines and kept the shadow inventory of homes higher than the non-judicial states. The Northeast markets are lagging behind the West Coast markets in their recovery. NVR’s geographical exposure is probably hurting them somewhat.

Implications for the other homebuilders:

NVR is the third homebuilder this year to report Q1 earnings. KB Homes and Lennar reported last month, and both firms beat expectations. Last week’s housing starts number of 1.036 million, the first print above 1 million since the recession began, was a welcome sign for the homebuilders. That said, the internals show a more disappointing view – the increase was driven by multi-family, not single family which is the bread and butter for the homebuilders. Building Permits fell 3.9% in March, another worrisome sign. The Homebuilder ETF (XHB) is up 43% in the past 12 months, and expectations are high for the homebuilders. Ryland Homes (RYL) and Pulte Homes (PHM) report later this week.