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NVR: The Anatomy of a 100-Bagger

How one homebuilder's business model pivot generated insane returns for shareholders.

If you invested $10,000 in NVR 30 years ago, you’d have roughly $13 million today. 
That’s a 27% CAGR since 1994!
So what makes NVR so special? Here’s the blueprint behind this ~130 bagger.
Bankruptcy: That’s probably not the first word that comes to mind for most investors when studying a 100-bagger.
However, the early 1990’s were a difficult time for the housing market in the US, and NVR (the largest homebuilder in the DC metro area at the time) was no exception. 
As demand for new homes dried up, NVR was caught with tons of debt-financed land stuck on its balance sheet. This led to NVR filing for Chapter 11 bankruptcy protection in 1992. 
After emerging from bankruptcy in 1993, then CEO Dwight Schar had learned the hard way how he wanted to run the business. He would avoid having debt, land, or vacant lots on the balance sheet as much as he could.
And the way Schar did that was by implementing a new model using “Lot Options”.
NVR no debt on balance sheetSource:
The Lot Option Model: Unlike traditional homebuilders which acquire large plots of land and hold that land on their balance sheet while they develop homes on it, NVR would instead purchase an "option" on the land. 
This meant that NVR would usually pay 5%-7% of the land value upfront and then could exercise the right to pay the remainder once the lot was finished. This model is considered “asset-light” as it keeps the inventory on NVR's partner's balance sheet instead of its own.
In the meantime, while the land is being held by NVR’s partners, NVR is actively selling the homes that’ll be there. Once NVR receives the commitment from buyers and knows the demand is there, then they exercise the right to buy the land and sell the home. 
While this model often means that NVR can't acquire land quite as cheap as other builders that buy in bulk and develop themselves, it offers downside protection for when the housing market turns. In fact, NVR was the only publicly traded homebuilder that remained profitable throughout the great financial crisis.
This "Just in Time" purchasing model also leads to lower capital investments upfront and quicker inventory turns. In other words, they sell the homes faster, which helps drive substantially higher returns on equity than the rest of the homebuilding industry. 
Return on equity homebuilding industrySource:
Economies of scale: In addition to having a unique model, NVR also generates better margins than most homebuilders as their scale in certain markets creates some cost advantages.
To name a few, NVR can get better deals from 3rd party contractors as a reputable partner in the area, materials costs are lower when bought in bulk, and NVR can do certain parts of the building process themselves such as walls, trusses, and millwork.
Anatomy of a 100-bagger: While NVR’s jaw-dropping returns for early investors like Punchcard Capital’s Norbert Lou are one of a kind in the homebuilding industry, some of the characteristics NVR possessed are common among other 100 baggers as well. Here are a couple:
  1. Room for multiple expansion: The wave of homebuilder bankruptcies in the housing market downturn of the early 1990’s left a sour taste in investors’ mouths. So much so that despite the business model shift, NVR still traded at a single-digit earnings multiple for several years following its bankruptcy. This has progressively changed as NVR demonstrated how much more resilient the land-option model is in difficult times. 
  2. High returns on capital: NVR’s unique model allows the company to consistently generate returns on capital at twice the rate of the rest of the homebuilding industry. 
  3. Room to invest: Simply generating a high ROIC or ROE doesn’t mean a stock will lead to stellar returns. The company also needs room to continue deploying capital at high rates. In the case of NVR, they could have used their early earnings to buy back stock but because they saw the opportunity and the need for new homes they continued to generate strong returns that way.
    In the word’s of long-time NVR investor, Norbert Lou “You actually want the companies that have such bountiful reinvestment opportunities that they don’t buy back any shares”.
NVR Earnings per ShareSource: