Author Topic: NVR - NVR Inc.  (Read 8759 times)

Gregmal

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NVR - NVR Inc.
« on: October 09, 2018, 09:46:45 AM »
The pitch is really complex.

It's a good if not great, proven capital allocator getting beaten up and thrown out because people apparently think no one will buy homes with a 5% interest rate...

I'm a buyer...
« Last Edit: October 09, 2018, 12:52:09 PM by Parsad »


voyager

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Re: NVR - NVR Inc.
« Reply #1 on: October 09, 2018, 02:36:10 PM »
Also a buyer....

Besides a great business at a reasonable price, you also get the potential of Amazon moving to DC for free. 

Spekulatius

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Re: NVR - NVR Inc.
« Reply #2 on: October 10, 2018, 04:18:54 AM »
I agree on NVR being best in class, due to their unique business model not owning any land. FWIW, decently managed home builders TOL and LEN trade around tangible book and PEĎs  ~ 7x. I donít recall them ever being that cheap, except during the financial crisis, when they were bleeding losses. We are far from that. Mr. Market hates cyclicals right now.
Life is too short for cheap beer and wine.

orthopa

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Re: NVR - NVR Inc.
« Reply #3 on: October 16, 2018, 08:17:52 AM »
Looking at NVR but Jeld wen guiding down.  https://finance.yahoo.com/m/02a54d85-5879-3df8-92ba-52ed74b28a33/jeld-wen-shares-drop.html

something is up with housing...

reader

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Re: NVR - NVR Inc.
« Reply #4 on: October 18, 2018, 08:19:38 AM »

no_free_lunch

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Re: NVR - NVR Inc.
« Reply #5 on: November 16, 2018, 10:40:01 AM »
Has anyone looked at the stock option grants to management?  To me it is enough to kill the thesis.  Over the last 2 years they issued something like 300k options which is roughly 8% of the total outstanding shares.  It is enough to negate all share repurchases over the last 2 years, which were substantial.   Consider that the company doesn't pay dividends and that over the past decade there has been no growth in total net income.  You are completely relying on share count reductions to drive the share price.  If we get diluted, where is the payoff?

Now I want to be objective here, so the pro to all this is that the options are not just share handouts, management needs to pay the current price and they have 5 years to exercise (as I recall) and the strike price on the options would have been higher for the most part than it is today.  So great.  I don't know exactly how to weight that out.  However, if you are buying into this you are counting on share price appreciation, and that appreciation is going to be muted by the additional shares the way I see it.

This whole thing feels like a bit too much of an equity grab for my taste.  Once again, I will watch from the sidelines.

Broeb22

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Re: NVR - NVR Inc.
« Reply #6 on: November 16, 2018, 11:10:59 AM »
Has anyone looked at the stock option grants to management?  To me it is enough to kill the thesis. 

Does it make sense to look at one year and draw conclusions about the management/investment? I know shares outstanding have declined significantly over time. I don't know if management has gotten greedier in recent years, other than the year you cite.

KJP

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Re: NVR - NVR Inc.
« Reply #7 on: November 16, 2018, 11:55:45 AM »
Has anyone looked at the stock option grants to management?  To me it is enough to kill the thesis. 

Does it make sense to look at one year and draw conclusions about the management/investment? I know shares outstanding have declined significantly over time. I don't know if management has gotten greedier in recent years, other than the year you cite.

The company has new stock incentive plans every four years, e.g., 2010, 2014, 2018.  They issue a very large number of options during the year in which the new plan is put in place, and then issue significantly fewer options in other years.  Some of the options are also subject to performance vesting, while others vest based solely on continued employment.  So, to get a fair picture of option issuance, you need to look at four-year intervals.  Is the issuance under the 2018 plan any different in size relative to shares outstanding than the prior issuances?

Also, what do you mean by income hasn't increased in a decade?  2018 will be far higher than 2008, though that's not a fair comparison because 2008 was near the bottom and included a large impairment charge. 

You're right that NVR is just now approaching the earnings it had in 2005, but that was the peak of a bubble.  In 2005,  there were 1.2 million housing completions in the three census regions in which NVR competes (Northeast, Midwest, South), and NVR closed on 13,800 houses.  In 2017, there were only 615,000 completions in those regions, and NVR closed on over 15,900 houses.  So the company has had massive market share gains.  The last  year that completions were comparable to 2017 was 2008, when completions in those three regions were 629,000.  As I noted above, NVR is far more profitable today and has a far greater market share today than it had in 2008. 

« Last Edit: November 16, 2018, 12:01:37 PM by KJP »

no_free_lunch

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Re: NVR - NVR Inc.
« Reply #8 on: November 17, 2018, 06:49:01 AM »
I agree that the huge option grants are a one-off but that is the most recent history that we have.  It still feels too much for a company with an $8B market cap.  I will also stand by my comments that income hasn't grown in a decade, because it is lower than 2006. I guess we can go letter of the law and say it hasn't grown in exactly a decade since 2008 was a slump but when we look back MORE than a decade earnings are down.   I get that we are comping to a record high period but nevertheless why is management rewarding themselves so much?

I just think of this as a commodity business where NVR has perhaps a better strategy and management.  There is not much moat and we are dependent on the health of the housing market, which is difficult for me to predict.   I also think much of the increase in EPS is due to share repurchases, but they were perhaps able to take advantage of the reduce share prices over the past decade.   To me, it is a decent investment if you really trust management.  I can see US housing continuing to grow, the current numbers are weak historically so we could have reversion to mean, and NVR historically has done very well.  However it's still a commodity business and so as soon as I see management in the cookie jar I am out.
« Last Edit: November 17, 2018, 07:01:03 AM by no_free_lunch »

KJP

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Re: NVR - NVR Inc.
« Reply #9 on: November 17, 2018, 08:02:36 AM »
I agree that the huge option grants are a one-off but that is the most recent history that we have.  It still feels too much for a company with an $8B market cap.  I will also stand by my comments that income hasn't grown in a decade, because it is lower than 2006. I guess we can go letter of the law and say it hasn't grown in exactly a decade since 2008 was a slump but when we look back MORE than a decade earnings are down.   I get that we are comping to a record high period but nevertheless why is management rewarding themselves so much?

I just think of this as a commodity business where NVR has perhaps a better strategy and management.  There is not much moat and we are dependent on the health of the housing market, which is difficult for me to predict.   I also think much of the increase in EPS is due to share repurchases, but they were perhaps able to take advantage of the reduce share prices over the past decade.   To me, it is a decent investment if you really trust management.  I can see US housing continuing to grow, the current numbers are weak historically so we could have reversion to mean, and NVR historically has done very well.  However it's still a commodity business and so as soon as I see management in the cookie jar I am out.

You seem to be saying that management's recent compensation is out of line by asking "Why are they rewarding themselves so much?"  To determine how much stock comp is "too much," I'd look at historical practices and per share wealth creation over time.  You can compare the size of the 2018 grant to the size of the grants in 2002, 2006, 2010 and 2014 to see its size relative to historical practice.  You can then assess whether the compensation structure has "worked," i.e., has the company significantly grown per-share value over time, despite its heavy use of stock-based incentive comp? Put another way, is the 2018 grant some kind of extraordinary thing, or is it consistent with a regular, longstanding practice of using stock compensation as a large part of management compensation?  Also, note the strike prices of the options.  Is there any pattern of trying to game the grant prices? 

Regarding the company's operating performance, I agree that the company is dependent on the housing cycle, but there's nothing management can do to change that cycle.  So, I don't think you can judge management quality by comparing today's earnings to cyclical peaks.  Instead, I would look at how the company managed through the bottom of the cycle and where it is now, given that we appear to be somewhere around mid-cycle, or perhaps below mid-cycle. 

As I noted earlier, management has significantly grown market share.  The table below shows NVR closings as a percentage of housing completions in the three census regions in which it competes:

1.05%   2000
1.09%   2001
1.14%   2002
1.18%   2003
1.14%   2004
1.15%   2005
1.22%   2006
1.46%   2007
1.71%   2008
2.25%   2009
2.55%   2010
2.39%   2011
2.57%   2012
2.69%   2013
2.46%   2014
2.66%   2015
2.60%   2016
2.60%   2017

As you can see, they the big growth in share was 2006-2010, i.e., during the very deep trough years.  I believe they were able to do this because of their capital and cost structure.  As other homebuilders struggled with solvency, NVR was able to take share and has maintained that share on the upswing.  That looks like strong management to me.

With respect to profitability, I would compare today's margins to historical margins the last time we were at this level of housing completions for any significant period of time (not 2008, because that was the middle of a collapse -- I think you have to go back to the 90's). 

At the end of the day, I agree with you that selling new houses is a commodity business.  So, being low cost is essential.  NVR's strategy seems to be aimed directly at that by concentrating geographically to get local economies of scale and manufacturing large portions of their houses off-site, rather than doing pure on-site stick-built.  Combine that with a very prudently managed balance sheet and capital allocation strategy with respect to land, and you appear to have a management that understands the limitations of the industry that it's in. 

 
« Last Edit: November 17, 2018, 08:18:48 AM by KJP »