The Industry's Best Homebuilder Still Has Room to Grow

The housing market's strong 2020 hasn't given way just yet...

Last year, after the initial shock of the coronavirus pandemic, the housing market went into a full-on boom. Millions of folks were untethered from their physical offices... needed bigger living areas once they needed space for adults and children to work and study there... or wanted to escape from crowded, locked-down cities.

All this fueled an ongoing uptrend in housing, fueled by a long-term inventory shortage and all-time-low mortgage rates that lowered folks' mortgage payments.

Even as home prices surged, sales hit their highest level in nearly 15 years.

This trend is still going strong this year...

Sales remain elevated on a historical basis, and new home sales hit a 15-year high in March. And housing inventory remains tight. In fact, existing homes are only lasting a little more than two weeks on the market before being sold.

To meet demand, buyers are turning to homebuilders... And good homebuilders have been able to accelerate their construction.

In March (the most recent data available), housing starts surged to the highest level since June 2006. Housing starts are a good indication of current housing demand. These data show homes that builders have started, probably with a buyer already lined up.

Homebuilders' revenue is still limited only by how many homes they can build. Today, we're circling back to one of our favorite ways to play this trend...

NVR (NYSE: NVR) is a $19 billion homebuilder that operates in 33 metropolitan areas across 14 states. Over the past 12 months, NVR has brought in more than $7.8 billion in sales.

We love NVR because it has the best business model in the industry...

Remember, homebuilding is generally a capital-intensive business. Most companies spend big money to buy land that they will later construct houses on. And worse than that, homebuilders have to hold the lots they plan to sell on their books – often for years. That leaves them susceptible to downturns in the housing market.

But NVR does things differently...

The company pioneered a "land light" homebuilding business model. NVR owns no raw land – none at all. Instead, NVR gives the landowner a small deposit up front to hold the lots and pays the rest only when it's ready to start building homes.

That means the company will never go bankrupt because of a housing bust... It's protected. NVR can always walk away from a deal with only a minor loss or renegotiate the price.

And now, more homebuilders in the sector are catching on. Several companies – including Lennar (LEN) and Hovnanian Enterprises (HOV) – have begun to adopt the same business model. But NVR has already mastered it. And that gives it an edge over the competition.

This shows up in NVR's return on assets ("ROA"). Put simply, ROA is a company's net income divided by its total assets. It's a good measure of a company's profitability.

NVR's ROA sits at 20.1% over the last 12 months. For comparison, the SPDR S&P Homebuilders Fund (XHB), which holds a basket of homebuilders and other housing-related stocks, has only seen an average ROA of 8.2% over the last 12 months.

So NVR's asset-light approach allows it to bring in more than double the income relative to its assets than its peers. It's clear why NVR's competitors are moving to follow its lead.

NVR's strategy is particularly valuable in a downturn... But it's thriving in today's strong housing market, too.

In the most recent quarter, NVR's earnings, revenue, and gross margins all came in above estimates. New orders were 6,314 units versus 5,015 a year ago, or an increase of 26%. In addition, the average selling price for the company's homes was $410,500. That was 10% more than the same period a year ago.

Its backlog of homes that are ordered but not yet built stood at 12,791 units, a gain of 42% versus the first quarter of 2021. They're more expensive, too – on a dollar basis, the backlog was up 51% to $5.2 billion.

The news brought some profit-taking from investors...

With the strong housing market, NVR's shares have surged. The stock is up more than 70% over the past year. So investors were taking some of their money off the table after the recent earnings report, sending shares about 2% lower.

But the stock has rebounded sharply since then, hitting a new all-time high. The gains aren't done yet...

The housing market is still going strong after a hot 2020. And it has powerful tailwinds going forward. NVR is one of the best homebuilders out there, with an asset-light business model that its competitors are now trying to copy. This positions the company perfectly to benefit from the red-hot housing market.

Sometimes investing is simple.