A Low Ceiling at NVR?

Whether or not housing is a bubble ready to burst, some investors are bailing out. Housing is "decelerating," says Ivy Zelman of Credit Suisse First Boston, who has downgraded to "neutral" the shares of NVR, one of the top U.S. homebuilders. Credit Suisse has done banking for NVR. Although Zelman doesn't expect a housing collapse, she doesn't see the sector outperforming the market in the coming year.

A number of hedge-fund managers are more bearish: They expect NVR, which rocketed from 162 a share a year ago to 336 on Nov. 26, to plunge to 135 in 18 months. On May 2, it hit 391. One short-seller who prefers not to be identified says that NVR's price-earnings ratio of 9.6 is higher than the 5 to 7 of its peers. The stock's rise has been helped by NVR's buyback at high prices. With only 7.2 million shares outstanding, the buybacks helped drive up the price, he says. That also let insiders sell high, he adds.

In the nine months ended Sept. 30, 2002, NVR bought back 1 million shares at an average of 296. In that period, insiders sold 400,000 shares at an average of 367. In May alone, NVR insiders sold $113.5 million worth of stock. What bothers this pro is that NVR's Rabbi Trust Fund, which manages NVR's deferred-compensation plan for top execs, was able to buy shares in the open market at just 219. He says rather than buy back shares, NVR should pay dividends, given its strong cash flow and profits. In 2001, NVR earned $236 million, or $24.86 a share.

Zelman expects $36.33 in 2002. The shorts don't question management's competence nor the $16 million bonus paid to CEO Dwight Schar. They wonder why insiders have been big sellers. On Oct. 28, 2002, Schar sold 18,000 shares at 336.33 a share, leaving him with 882,000 shares. NVR declined to answer the questions raised by the shorts.

By Gene Marcial

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