NVR: A Table-Pounding Buy?
My favorite investor of all time, Warren Buffett, once wrote, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
It’s even better when you can find a wonderful company at a wonderful price.
Homebuilder NVR Inc. (NYSE: NVR) went public in 1993.
If you invested $10,000 in shares of NVR at that time, today, you would be sitting on an astounding $4.3 million – a total investment return of around 43,000%!
To appreciate how insane that is, consider that a $10,000 investment in the S&P 500 over the same period would now be worth just $92,470 – a return of 824.7%.
Even a $10,000 investment in Buffett’s market-smashing Berkshire Hathaway (NYSE: BRK-A) would be worth only $262,200 – a 2,522% increase.
The primary reason for NVR’s incredible long-term performance is it has used a better business model than other homebuilders.
While most of the homebuilding industry has historically tied up billions of dollars in cash by buying land for future development, NVR purchases land only immediately before development.
That means NVR’s business model is “land-light,” while the rest of the homebuilders have been “land-heavy.”
While other homebuilders have been reinvesting all of their cash into land, NVR has been returning it to shareholders.
The execution has been brilliant.
As a publicly traded company, NVR has used stock buybacks to decrease its outstanding share count by an ABSURD 84% – from more than 18 million shares to around 3 million.
Every time NVR repurchases shares, remaining shareholders own a bigger percentage of the business.
This incredible, disciplined return of capital to shareholders is what has turbocharged NVR’s stock market rampage over the past three decades.
The share performance of NVR over the long term provides proof of this business model’s superiority.
An exceptionally well-managed company like this is a smart purchase anytime it trades at anything close to a reasonable valuation.
Today, I think we can get it at close to what I’d consider an unreasonably good valuation.
With a price-to-earnings ratio ranging from 10 to 11, NVR shares are the cheapest that they have been in a decade – cheaper than they were even at the bottom of the COVID-19 market crash of 2020.
Now, I know that rising mortgage rates have caused the housing market to slow.
That will have an impact on earnings in the short term, and we may be at the peak of the cycle.
But over the medium and long term, the reality is that the U.S. needs a lot of newly constructed houses.
As I’ve written before, we are still trying to catch up from the massive underbuilding in the decade that followed the housing crash in 2008.
Bottom line: NVR is a great business trading at a nice valuation.
I view this stock as being at least slightly undervalued and perhaps a table-pounding buy at these prices.
Valuation Rating: Slightly Undervalued
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