NVR (NYSE:NVR) is a high-quality company that has a unique business model. Its model has allowed it to not only survive multiple housing cycles, but consistently earn high returns on capital and grow revenue, earnings and FCF. Short-term investors are fleeing the stock, evidenced by its 33% decline from its peak, but I would argue that NVR’s business model is unimpaired, has the ability to survive downturns and grind on. Investors with a long-term view have the opportunity to acquire a high-quality business trading at a cheap valuation.
Founded in 1980, NVR is in the business of constructing and selling single-family detached homes, townhomes, and condominium buildings (all are primarily constructed on a pre-sold basis), which operate under the following trade names: Ryan Homes, NVHomes and Heartland Homes. The company is one of the largest homebuilders in the US and operates in 34 metropolitan areas in 14 states and Washington DC. NVR also operates a mortgage banking and title services business through its subsidiary NVR Mortgage Finance.
Most homebuilders operate under terrible economics: they are cyclical, interest-rate sensitive, and are left with large inventories of unsold properties during inevitable downturns. Levered homebuilders inevitably go bankrupt while unlevered ones suffer large inventory writedowns.
NVR, however, operates under a different model that allows it to survive and even flourish during the downturns. The two main differentiating points are:
Option Contracts (or lot purchase agreements: “LPAs”): NVR does not engage in land development directly and acquires finished building lots from various developers via options contracts; for example, NVR would pay an upfront premium (or deposit) in exchange for the right to acquire the land later, which allows NVR to sidestep the speculative nature of land purchase/development and employ less capital to control large blocks of land.
Pre-Selling: NVR pre-sells nearly all its homes, which reduces risk significantly (whereas other homebuilders typically engage is some speculative construction by not pre-selling).
If it’s not obvious yet, NVR’s business model allows it to sidestep much of the speculation that arises in typical homebuilding, which allows it to earn above-average returns on capital through several homebuilding cycles.
With 3,382,726 shares outstanding and a current price of ~$4,000, the current market cap is $13.5B.
NVR has consistently grown revenue, earnings and FCF over the past decade (and more).
ROA (Median): 17.6%
ROE (Median): 33.3%
ROIC (Median): 23.1%
Revenue CAGR: 12.9%
Assets CAGR: 12.6%
Earnings Per Share (EPS) CAGR: 30.1%
These numbers are mind-blowing numbers; you won’t find many companies in the world with these performance metrics.
On a valuation basis, NVR is also trading very cheap:
Yield: no dividend (never paid a dividend but has consistently bought back stock)
Insiders own ~10.6% of the company, which is a good amount (I personally prefer to see at least 5%). Insiders also bought in the $3,000-4,000 range during the 2020 downturn, but have been mainly selling in the $4,000-5,200 range.
backlog: as of 3/31/2022, NVR’s backlog increased by 5% to 13,443 units and increased on a dollar basis by 20% to $6.2B
Share Repurchases: NVR is a “cannibal”, or a company that actively buys back undervalued stock; in December 1995, there were 15.21M shares outstanding, now there are 3.4M; in Q1 2022, the company repurchased ~146,000 shares at an average price of ~$5,000 (~$750M in total)
Homes as a Necessity: I’m no expert on the housing market, but homes are a necessity (shelter) and there will be a demand for decades to come; NVR has the perfect business model to stay on top and grind through many cycles
Recession Risk: a recession would obviously slow down the demand for homes (as well as everything else), but I view this as a short-term risk and not something that would permanently impair NVR as a business
Interest Rate Risk: as interest rates rise, the cost of financing a home becomes more expensive, which reduces the demand for homes; however, similar to the recession risk, I view this as a short-term risk and something that would not impair NVR as a business
Another point to make is that even if NVR’s share price does drop, its consistent repurchase plan kicks into a higher gear, which allows the company to repurchase more shares at a cheaper price. Interestingly enough, as an investor, you might even want the price to drop so NVR can buy back more shares, which inevitably increases your stake in the company.
NVR is one of the best businesses that few people have heard of. It earns extremely high returns on capital and has consistently grown revenue, earnings and FCF through multiple homebuilding cycles. Short-term investors are fleeing the stock, given its 33% decline from its peak, but I would argue that NVR’s business model is unimpaired and has the ability to survive downturns (and even benefit). Investors with a long-term view have the chance to acquire a high-quality cannibal trading at a cheap valuation. In addition, I would also highly recommend readers to read Nobert Lou’s (Punch Card Management) 2001 write-up on NVR.
Based on the analysis above, I recommend a long position in NVR with a holding period of a few years (maybe even forever). I have no idea what the stock price will do in the short term, but I would look to add more if it continues to decline, as I see the company having the ability to compound for many years to come.