Author Topic: NVR - NVR Inc.  (Read 8763 times)

no_free_lunch

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Re: NVR - NVR Inc.
« Reply #10 on: November 17, 2018, 11:00:25 AM »
Thanks for your thoughts KJP.

The strike price of the options was advantageous for existing shareholders.  I ball parked the strike at $3k, vs $2.4k current price.  So they did at least choose a high point in the price to issue at.

I will keep watching this one for now.


KJP

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Re: NVR - NVR Inc.
« Reply #11 on: April 23, 2019, 06:53:24 AM »
NVR is up ~65% from the late 2018 low.  I have it at about 14x EBIT and 18x earnings, with new bookings slowing down and being weighted more toward less profitable houses in the Southeast.  So, I think it's now somewhere around fair value.
« Last Edit: April 23, 2019, 10:24:31 AM by KJP »

Gregmal

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Re: NVR - NVR Inc.
« Reply #12 on: April 23, 2019, 10:15:00 AM »
NVR is up ~65% from the late 2018 low.  I have it at about 14x EBIT and 18x earnings, with now bookings slowing down and being weighted more toward less profitable houses in the Southeast.  So, I think it's now somewhere around fair value.

Yup, yup.... this and LGI Homes (the not so pretty one) up massively in a few months. But value investing is dead...

wolverine890

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Re: NVR - NVR Inc.
« Reply #13 on: March 17, 2020, 07:09:51 AM »
Is there liquidity in this name?

I ask because the underlying business fundamentals shouldn't be hurt by the virus? I would think buying a new house is nothing like buying an existing house in terms of social distancing. Also, NVR gets paid before they build.

Even if construction stops for awhile, it would just be pushing cash flows down the road. It wouldn't hurt them? Or am I thinking about this wrong?

coc

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Re: NVR - NVR Inc.
« Reply #14 on: March 17, 2020, 07:41:22 AM »
Is there liquidity in this name?

I ask because the underlying business fundamentals shouldn't be hurt by the virus? I would think buying a new house is nothing like buying an existing house in terms of social distancing. Also, NVR gets paid before they build.

Even if construction stops for awhile, it would just be pushing cash flows down the road. It wouldn't hurt them? Or am I thinking about this wrong?

NVR has a very robust business model. I would agree that itís a slow down and not a long term problem.

However I recommend closet evaluating their earnings and the amount of stock the company issues to calculate their real earnings. I donít believe the reported numbers are right.

KJP

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Re: NVR - NVR Inc.
« Reply #15 on: March 17, 2020, 07:49:26 AM »
Is there liquidity in this name?

I ask because the underlying business fundamentals shouldn't be hurt by the virus? I would think buying a new house is nothing like buying an existing house in terms of social distancing. Also, NVR gets paid before they build.

Even if construction stops for awhile, it would just be pushing cash flows down the road. It wouldn't hurt them? Or am I thinking about this wrong?

If we're headed toward a recession, then new home sales likely will fall, with the depth likely correlated with the severity of the recession.  If the depth and duration of any recession is significant, than NVR will suffer some permanent losses (rather than just deferring sales into the future) due to their options on land expiring without purchase (and consequent writeoffs).  You can see that happening if you look at the post-2008 financials. 

All that being said, NVR is a company I have my eye on.  I believe it has the right balance sheet and strategy (options to buy land, rather than carrying debt-financed land purchases on balance sheet) and very little debt.  That enabled it to take share during the aftermath of the GFC and I'd expect that to happen again in any additional severe downturn.  I haven't decided yet what my buy price would be though.

KJP

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Re: NVR - NVR Inc.
« Reply #16 on: March 17, 2020, 07:52:53 AM »
Is there liquidity in this name?

I ask because the underlying business fundamentals shouldn't be hurt by the virus? I would think buying a new house is nothing like buying an existing house in terms of social distancing. Also, NVR gets paid before they build.

Even if construction stops for awhile, it would just be pushing cash flows down the road. It wouldn't hurt them? Or am I thinking about this wrong?

NVR has a very robust business model. I would agree that itís a slow down and not a long term problem.

However I recommend closet evaluating their earnings and the amount of stock the company issues to calculate their real earnings. I donít believe the reported numbers are right.

What adjustments would you make to GAAP financials to account for the relatively large equity-based component of NVR's compensation structure?

wolverine890

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Re: NVR - NVR Inc.
« Reply #17 on: March 17, 2020, 09:50:12 AM »
Is there liquidity in this name?

I ask because the underlying business fundamentals shouldn't be hurt by the virus? I would think buying a new house is nothing like buying an existing house in terms of social distancing. Also, NVR gets paid before they build.

Even if construction stops for awhile, it would just be pushing cash flows down the road. It wouldn't hurt them? Or am I thinking about this wrong?

NVR has a very robust business model. I would agree that itís a slow down and not a long term problem.

However I recommend closet evaluating their earnings and the amount of stock the company issues to calculate their real earnings. I donít believe the reported numbers are right.

What adjustments would you make to GAAP financials to account for the relatively large equity-based component of NVR's compensation structure?

I would assume he would dilute their earnings by ~8% to account for the equity options outstanding? But i see two problems with that, and maybe i am thinking about this wrong. First, if this is a prolonged downturn, then most of that equity compensation isn't nearly as costly as it otherwise would have been. Second, I would think this downturn would provide the company with a great opportunity to repurchase their shares.

On a different note, during that last recession where home builders and banks were the primary target; they were hurt, but quickly recovered given their asset light business model. In fact, Lennar has been trying to move away from owning raw land for this very reason. I believe they had less than 10% of their home buyers cancel their contracts in 08/09 based on the high credit score of their base customers.

But more important than all of this, is that they seem like a company that is designed for downturns. Fragmented geographic customer base, low debt, and the ability to significantly redeploy capital and increase their market share. From 2006 to 2018 they went from ~1% of new home builds to ~3%.

The final thing i have been thinking about is that they were recently added to the S&P500 index. They aren't a very liquid stock. If the index is selling off then this would get disproportionately hurt...

roark33

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Re: NVR - NVR Inc.
« Reply #18 on: March 17, 2020, 10:21:49 AM »
As per liquidity, I think you can already see that happening.

coc

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Re: NVR - NVR Inc.
« Reply #19 on: March 17, 2020, 10:25:26 AM »
Is there liquidity in this name?

I ask because the underlying business fundamentals shouldn't be hurt by the virus? I would think buying a new house is nothing like buying an existing house in terms of social distancing. Also, NVR gets paid before they build.

Even if construction stops for awhile, it would just be pushing cash flows down the road. It wouldn't hurt them? Or am I thinking about this wrong?

NVR has a very robust business model. I would agree that itís a slow down and not a long term problem.

However I recommend closet evaluating their earnings and the amount of stock the company issues to calculate their real earnings. I donít believe the reported numbers are right.

What adjustments would you make to GAAP financials to account for the relatively large equity-based component of NVR's compensation structure?

Sure, good question. I will "show my work" on this one and hopefully you guys find it useful.

NVR is actually quite an easy company to do this for, because their financials are simple and their capital allocation policy even simpler (use all cash flow to buy stock - every year going way back). Over the past ten years they have reduced their shares roughly from 6 million to 3.66 million outstanding, which is nice to see. About 5% reduction per year.

However, using their filings, you can see they actually repurchased on the open market 4.3 million shares. Shockingly, that means they issued almost 2 million shares to the employees on a starting base of 6 million.

The average buyback price was about $1,235/share. Net of cash inflows from exercise, they spent just over $4 billion for the decade buying stock. What does this mean to me?

It means to me that of the $4.1 billion of reported repurchases (almost an exact match to $4 billion of net income 2010-2019), only about $2.9 billion worked for the benefit of shareholders ($1,235 buyback price x 2.35 million shares actually reduced).

So their true "owner earnings" were 70% of what was reported. Again: 100% of earnings went to buybacks, and only 70% of buybacks stuck to shareholders' ribs. It is quite literally cash out the door -- if NVR didn't issue all that stock, they could have spent $2.9 billion on buybacks and sent the other $1.2 billion to shareholders, and have the same number of shares out today.

I know this will feel crazy high for some of you, but it is the truth. They only expensed about $45 million per year through the income statement.  That is clearly not correct.

You can do whatever you like with this to adjust going forward, but I would not just dilute the shares 8%, because NVR will be issuing a lot more over the coming decade. This is simply how they run the business.

They certainly have a great business model and also create value with repurchases.