In 2016, we presented a video on Charter Communications and Liberty Broadband (which we still hold). Charter Communications is overseen by John Malone who was featured in the book The Outsiders which was written by William Thorndike and profiled 8 unconventional CEOs that had dramatically outperformed the S&P over multiple decades.
In a subsequent Google Talk, Thorndike was asked which companies might potentially fit the Outsiders model today. One of his answers was NVR which is an unconventional yet exceptionally well run company that receives little sell side coverage.
NVR is the 4th largest home builder in the United States and focuses on first time buyers on the East Coast. The success story of NVR really starts 25 years ago, in 1992 after the company declared bankruptcy.
Homebuilders often run into financial difficulties due to industry downturns and leveraged balance sheets. NVR was no different, filing in 1992 and emerging from bankruptcy in 1993 with a dramatically different business model.
Instead of buying a large amount of land for future homes like other developers, NVR now only buys options on land, putting a deposit of up to 10%.
The company exercises this option only when the buyer signs the purchase contract.
If market conditions weaken, NVR can forfeit its deposit and walk away. This is in stark contrast to NVR’s previous model and traditional homebuilders who can be stuck with homebuilding inventory at the exact wrong time.
This asset light model allowed NVR to be the only US homebuilder to avoid an annual loss in the GFC.
Over the past 10 years NVR shares have dramatically outperformed the S&P and its peer group. Even in the stronger housing markets of the last 3 years, NVR has continued to lead on shareholder returns.
Not only is return on equity and return on capital higher than its competitors but NVR actually has the least leveraged balance sheet which will help shareholders when the next recession eventually occurs.
NVR’s phenomenal track record is not surprising when you look at management’s incentives. Not only does NVR’s CEO (Paul C. Saville) and chairperson have hundreds of millions of dollars in the company, but their bonus payments are based on return on capital and vest over a 4 year period. This incentive structure differs greatly to its peers that focus on maximizing profits over just 12 months.
Like many outsider companies, NVR does not have a robust investor relations department, the company is notoriously un-promotional, holding no conference calls or providing guidance.
As we mentioned before, homebuilding is a cyclical industry and from the data we are reading there is no question US housing is likely to be one of the strongest sectors going forward. Not only is the average US home well below the real price from 10 years ago, but the supply of new homes is dramatically below household formations and is likely to increase materially as millennials finally start to move out from apartments and their relatives’ homes and settle down.
When Berkshire Hathaway vice chairperson Charlie Munger was asked how to be a successful investor one of his answers was to focus on the cannibals, companies that have a history of buying back a large amount of their own stock. In this respect, NVR is an outlier even by cannibal standards. Since 1994, shares outstanding have declined by an insanely large 77%.
When Saville was asked by an investor about the buyback he said, ‘If you are a long-term owner of the stock, maybe in about ten years you’ll own one share and we’ll own one share.’
This buyback has helped EPS grow by a massive 26% per year since 1994.
As incredible as NVR is, it remains valued well below the average of the S&P at just 16x estimated 2017 earnings and 17.8x 2019, including stock option expense.
In conclusion, we feel NVR is a great company, with a superior business model, has great management with a well aligned CEO and is currently trading for a great price.
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Disclosure: I am/we are long NVR.