NVR, Inc. (NYSE:NVR) Looks Inexpensive But Perhaps Not Attractive Enough

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider NVR, Inc. (NYSE:NVR) as an attractive investment with its 15x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

NVR certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for NVR

Keen to find out how analysts think NVR's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For NVR?

The only time you'd be truly comfortable seeing a P/E as low as NVR's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Still, the latest three year period has seen an excellent 97% overall rise in EPS, in spite of its uninspiring short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 0.1% per year during the coming three years according to the six analysts following the company. With the market predicted to deliver 10% growth per year, that's a disappointing outcome.

With this information, we are not surprised that NVR is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that NVR maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with NVR (at least 1 which is potentially serious), and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than NVR. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.