NVR - A Homebuilding Black Sheep To Own In Downturns

NVR's open secrets to a land-light and regional-focused strategy brought a 30%+ CAGR return since reformation in 1993. It will thrive in downturns and I am tracking 4 KPIs to own a piece.

Hi, my fellow Sleep Well Investors (SWIs),

I am Trung. I write 10+K words deep-dives on market leaders. I also write Thesis Trackers updates to follow up on their performance. When the right price comes, I buy them for the Sleep Well Portfolio, which I am building for my 4-year-old daughter to redeem in 2037. I disclose the reasoning of all BUY and SELL (ideally never) transactions (1st, 2nd, and 3rd). Join me in building generational wealth.

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In this deep dive, I am excited to bring you my 8th pick - NVR Inc. - the largest homebuilder in the US East Coast and the fourth largest nationally, with a $20B market cap.

It fits the Sleep Well Investments mold with anti-fragile attributes that have generated profit every year since 1993 - no peers have managed this - and is built to thrive in downturns - no peers can say this. The market rewarded NVR stock with a compounded 30%+ CAGR return since - the best in the industry and the 6th best-performing stock in the US in the past 30 years.

NVR is fairly valued; why study NVR now?

NVR is a phenomenal business. The write-up aims to equip you with a deep understanding and a tracking system - four leading indicators of the business and the capital allocation actions of the management - so that you recognize the opportunities when you see them. When you study the best, you get better at eliminating average ideas! Only a handful of companies are worth your time, let alone owning a piece.

Secondly, we will likely approach a challenging homebuilding period in the US. Affordability has been at its lowest for 20 years, and from peak to peak (2006-2022), housing starts have barely grown. NVR’s stock could be hit if sentiment gets worse.

Studying NVR will also help us understand market leaders in adjacent markets:

• Ferguson (FERG) in plumbing,

• Site One (SITE) in landscaping,

• Watsco (WSO) in air-conditioning,

• Sherwin Williams (SHW) in paints,

• Pool Corp (POOL) in swimming pools,

• HomeDepot (HD) and Floor and Decor (FND) in home improvements,

• Solar Edge (SEDG), First Solar (FSLR), and Enphase (ENPH) - solar energy platforms and components, and many more.

NVR goes into my special jar. Robert G. Kirby, then a portfolio manager at Capital Group in 1984, would put this business in his Coffee Can Portfolio, and Nobert Lou certainly did well with NVR in his Punch Card portfolio, buying in 1997 at $30 and selling in 2007 at $700/share. Had he held, even at the top, NVR would continue to 10x since then. That’s not to say the party is over; there are still at least a few decades of strong performance. We’ll see why!

First, a homebuilder’s life expectancy is about one cycle. NVR was atypical. Founded in 1980 with a traditional home-building model, it loaded up debts and bought lands as the market rose, but as the economy deteriorated in 1989, it struggled to pay off its debts whilst the land was losing value. Shortly, it filed for bankruptcy in 1992.

Because most homebuilders are land speculators and the business requires a lot of upfront capital, the story usually ends when the music stops (recession).

But believe it or not, since NVR’s emergence from its bankruptcy in 1993, it transformed the business, sworn off land speculation, and focused on profitability. Its story is rewritten.

It is the only homebuilder that has avoided losses in the last 30 years. Even during the 2007-12 subprime crisis, its return on invested capital was the same as some peers in the peak period (!). Moreover, peers have known NVR’s blueprints for three decades, yet no one has replicated it successfully.

NVR must be the black sheep like the one below!

Looking closer into NVR’s playbook, one finds a disciplined execution of a land-light, regional-focused, and profit-first strategy. On top of that, management’s capital allocation has been exemplary; they bought back 60% of shares since the last peak in 2006 and compounded free cash flow (FCF) per share by 12% CAGR whilst housing starts barely improved and input costs (labor and construction materials) increased for everyone.

I can’t find a better business that will benefit in a downturn, given that most homebuilders still operate the traditional business model - capital-intensive and leveraged - which makes it even more worthwhile to study NVR. When (not IF) the next housing crisis hits, NVR will stand as the main beneficiary again.

You can expect a thorough analysis into:

1. Why is NVR a sleep-well business?

   1. Disciplined asset-light business building the American Dream

   2. Maximise market share at the regional level

   3. Irreplicable invisible moat

   4. Value creation

2. Breaking down future growth and tracking system.

   1. Demand: affordability, millennials, population growth from WWII

   2. Supply: housing stock shortage, vacancy rate, new build

   3. Average house price movements

   4. What to track to get ahead

   5. Growth opportunities

3. Operation risks

4. What’s a good entry price?

   1. Base case

   2. Bear case

5. Sleep Well Investments scorecard

6. Thesis Tracking -

   1. Leading indicators

   2. Buying signals