The Sturdiest Homebuilder
NVR's lower capital requirements and increased flexibility over peers make it the best homebuilder to own over a full housing cycle.
NVR's lower capital requirements and increased flexibility over peers make it the best homebuilder to own over a full housing cycle.
James Krapfel: Homebuilders are in a prime position to sell more homes because the large millennial generation is aging into their late 20s and 30s, which are the prime home-buying years. Further, homeownership rates across age groups should increase as a significant amount of pent-up demand releases alongside greater levels of employment, improving wage growth, and looser mortgage eligibility standards.
Indeed, recent data indicates that the housing recovery is back on track, following the material slowdown of last year. However, we expect homebuilder investors to be disappointed by a lack of operating leverage. Homebuilders' gross margins already improved to near or above prior peak levels in 2014 but began to descend late last year as rising land, labor, and material prices more than offset decelerating home-selling-price advances. We expect the trend of declining gross margins to continue over the next several years in this no-moat industry, especially because of rising land costs and the sales mix shift to lower-margin entry-level homes.
Still, there is one homebuilder that stands out from its peers. NVR (NVR) employs a unique land-light model that entails entering into options with land developers to acquire housing lots on a just-in-time basis. Although NVR sacrifices a bit on margins, the increased flexibility and lower capital requirements afforded by its strategy allow the company to (1) produce ROICs that embarrass its homebuilding peers, (2) generate significantly higher free cash flow as a percentage of sales than peers, and (3) repurchase a substantial amount of stock at shareholder-value-accretive prices.
NVR is not immune to the gross-margin headwinds, but we believe it is the homebuilder to own over a full housing cycle. The stock currently trades in 4-star territory relative to our $1,600 fair value estimate.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals
and individual investors. These products and services are usually sold through
license agreements or subscriptions. Our investment management business generates
asset-based fees, which are calculated as a percentage of assets under management.
We also sell both admissions and sponsorship packages for our investment conferences
and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.