NVR Inc. (NVR, Financial) is the best company in the residential construction industry, garnering the highest multiple of the Big 3, and trailing only Lennar (LEN, Financial) and DR Horton (DHI, Financial) in market capitalization.
NVR has purposefully kept its growth under wraps, using a capital-efficient strategy to maximize return on investment rather than overextend through the new housing boom. It relies heavily on purchase agreements to acquire pre-sold financed lots, which differs from other homebuilders who look to directly own and develop raw land.
NVR pays a small amount of cash to a developer up front, which gives it an option to purchase completed lots at discounts and reduces the amount of capital it needs to commit to a development. More importantly, the company doesn't have to take on an immense amount of speculative risk or leverage. This has helped NVR keep its debt level roughly equal to its cash level, which puts it on much stronger footing compared to DR Horton and Lennar, even if it means sacrificing faster growth.
When a homebuilder takes on too much debt to achieve short-term financial goals, it can grow right out of business. Case in point is Mexican homebuilder Homex, which experienced massive growth in the early 2000s, took on too much debt and now is essentially a shell company. This is unlikely to happen at Lennar or DR Horton; however, when the next bear market comes, NVR could be pushed to the top of the industry.
2009 - NVR generated $101 million in net income, or $31.26 per share, on $2.7 billion in sales and had a book value of $295.
2012 - NVR generated $181 million in net income, or $35.12 per share, on $3.2 billion in sales and had a book value of $301.
2017 - NVR generated $538 million in net income, $126.77 per share, on $6.3 billion in sales and had a book value of $447.
With its headquarters in Reston, Virginia, (just outside of Washington, D.C.), NVR sticks to its own circle of competence, building in established markets typically within the eastern U.S.
Some correlate this to superior management rather than a sustainable competitive advantage, but culture matters too. When a company can generate $600 million in net income on $6.6 billion in sales, while spending less than 5% ($18 million) on capex, the entire organization has to be doing something right. As a bonus, the top executives are all young enough to stay on the job for decades to come.
In either case, NVR looks well-positioned to ride the tide of increasing home prices, which despite interest rate hikes should last into 2020 and possibly beyond.
NVR is set to release earnings at the end of this week. Last quarter saw better-than-expected financial results with revenue and earnings per share both beating estimates. At the same time, the company bought back over $350 million worth of stock, a good move considering the price decrease came in January, at the end of the company’s 2017 fiscal year.
Currently trading at 20 times earnings, if the company can book over $200 a share in 2019, investors would be in line for 47% short-term gain, and that number may only get bigger in the years that follow. In fact, barring a macro burst, NVR’s stock is set for at least 100% gains in the next five years.
Disclosure: I am not long/short any stock mentioned in this article, but may initiate a long position in the next 72 hours.
