The Best Homebuilding Stock for Investors

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Fool contributor Rick Aristotle Munarriz wrote an article about 4 stocks that might reach $1,000 before Google. In that article, he mentioned one homebuilder in the U.S., NVR (NYSE: NVR). Since August 2011, NVR has advanced significantly, from about $600 to more than $1,000 per share. Rick said that NVR seemed to be better than most of its peers as the company had remained profitable during the residential real estate crisis.

Let’s look closely to determine whether or not NVR is a good investment opportunity for investors now.

Business snapshot

NVR, founded in 1980, operates in the business of construction and sale of single-family detached homes, townhomes and condominium buildings. The company also has a mortgage banking and title services business to better serve its customers. NVR has not been involved in land development. Instead, NVR has acquired finished building lots at market prices from a variety of development entities under fixed price purchase agreements.

The company reported that this lot acquisition strategy avoids the risk of direct land ownership and land development. The business is divided into four main geographical segments: Mid-Atlantic, Northeast, Mideast and Southeast. The majority of its revenue, $1.88 billion, or nearly 60% of the total revenue, was generated from the Mid-Atlantic segment. The Mideast segment ranked second, with $630.4 million in revenue in 2012.

Homebuilders in general, and NVR in particular, would benefit from the improving real estate market in the U.S. In January, the National Association of Home Builders (NAHB) reported that the Improving Markets Index (IMI) is on the rise, growing from 12 markets in September 2011 to 259 metropolitan areas in February 2013. Interestingly, February was the sixth consecutive month of IMI's growth. According to NAHB, the index measures three sets of data including employment growth, house price growth and single-family housing growth to identify top improving housing markets in the U.S.

An impressive 10-year performance

The 10-year operating performance record of NVR is quite fantastic. In the worst period of the U.S. real estate market and economy during this period, NVR still reported profits. Net income dropped from nearly $700 million in 2005 to $100 million in 2008. However, the situation has improved as the net profit increased to $181 million in 2012. 2012 EPS came in at $35.12 per share and free cash flow was $252 million.

NVR could consistently generate profits without using a lot of leverage. As of December 2012, it had $1.48 billion in total stockholders’ equity, $1.34 billion in cash and $606 million in long-term debt. As the company has kept buying back its shares in the stock market for the past five years, the accumulated treasury stock has increased significantly, from nearly $3 billion in 2008 to $4 billion in 2012.

The most profitable but cheapest valued

With the current trading price of $1,000 per share, NVR is worth nearly $5 billion on the stock market. The market is valuing NVR at nearly a 15.2 EV/EBITDA ratio. The absolute EV multiple seems quite high, but compared to its peers including D.R. Horton (NYSE: DHI) and PulteGroup (NYSE: PHM), NVR’s valuation doesn’t seem to be high anymore. D.R. Horton is trading at $22.25 per share, with a total market cap of $7.15 billion. The market values D.R. Horton at nearly 25 times EV/EBITDA.

PulteGroup is the biggest company among the three, with a $7.36 billion market cap. It also has the highest valuation at nearly 30.7 times EV/EBITDA. Even with the lowest valuation, NVR seems to be more profitable than D.R. Horton and PulteGroup. NVR’s operating margin is the highest at 9% while the operating margins of D.R. Horton and PulteGroup were only 7% and 5%, respectively. PulteGroup is the most leveraged company with a debt-equity ratio of 1.1 while D.R. Horton employs no debt. NVR’s debt-equity ratio is a moderate 0.4.

Foolish takeaway

Personally, I am quite impressed with NVR as it remained profitable during the residential real estate crisis several years ago. With the lowest valuation, highest operating margin and moderate leverage among peers, NVR could be the best homebuilder for long-term investors to “surf” the U.S. real estate market recovery. 

hoangquocanh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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