In the writeup you say that the options take into effect an expected 5-10% increase in land prices from appreciation and a 2-5% increase in land prices from inflation. Does this mean there should be a 7-15% total price increase baked into the option strike price per year? So if the option is 4 year length and we are expecting an approximate 10% increase per year, the option would be struck more than 40% above current market price? Where do you get your base assumptions for expected price appreciation? Do you know if these assumptions have changed over the past 5 years? Thanks.
results show that the writedown for 4Q2006 was "only" $60 million. There are still 88,500 lots under their control and $402 million in Contract Land Deposits. Have they managed to dodge the bullet for another quarter?
we have noticed that some respectable investors such as Ronald Muhlenkamp, Sequoia's Ruane Cunniff, Baron Capital's Ron Baron, as well as The Prudent Speculator's John Buckingham, have shares of NVR in their portfolios (Baron has been reducing the position rather quickly).
Have you had the chance of talking to any of these guys, especially Muhlenkamp, who has 2.5% of his fund in the company, about their theses for NVR?
Thanks for the excellent idea and have a great 2007.
1) Northern Virginia is lumped into DC with regards to NVR's report. 25% of LTM closings were from the DC area. Otherwise, according to Ivy Zelman (CSFB Homebuilding analyst), 30% of NVR's deliveries were in Virginia and 51% of it's EBIT were in Virginia in 2005. To be fair, it look's like Ivy's numbers are including Washington D.C.
2) 2007 Earnings. Note, our normalized earnings number of about $30/share assumed a closing level of 12,000 homes, in line with the street, gross margins back to 1999 levels (a couple hundred basis points below that of their peers) and only about $50 mm cut in SG&A given the increase in community count. In 2007, the current order trends imply there will be about 10,000 closing in 2007. Depending upon the ability to cut SG&A and the amount of discounting needed to move their inventory (as well as a mix shift towards lower margin areas), earnings could be $20 to $25/share in 2007. However, this assumes a pretty bearish scenario with regards to the D.C. metropolitan area.
1) I was quite surprised to read recently that Virgina's median price was down a whole 9% YoY. What's the correlation between Virginia and NVR areas?
2) The market is clearly stubborn about valuing many, many stocks based on their actual earnings or EBITDA, including the HBs, the banks...(instead of using book value, intrinsic value, NAV...etc) and as you point out, only earnings dissapointment will ensure that NVR not only goes down but *stays* down. Therefore, if you can provide your normalized earnings or EBITDA number for 2007 it would be very appreciated.
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