NVR (NVR 0.97%) doesn't do business the way most home builders do. The company is conservative in up cycles and aggressive when times are bad.
On this clip from Motley Fool Live 's "Industry Focus," recorded May 20, "Industry Focus" host Nick Sciple and Motley Fool analyst John Rotonti discuss NVR's unique philosophy and explain why it is to the benefit of investors. Rotonti says "the industry doesn't know what it is doing," predicting NVR's model will outperform over time.
Nick Sciple: I think that makes a lot of sense. One of the things you said earlier that I think is maybe interesting to double underline for investors, you talk about how NVR defines the market region by region, whereas you hear other folks defining the market nationally. If you think about common sense, real estate is a very local market, but defining the market in that way. How do you think about that as an investor from an analytical point of view and when you see this company taking a different approach than others, does that make your antennas go up?
John Rotonti: No. The industry doesn't know what it's doing. They basically survived the global financial crisis. NVR went through with 12 percent returns on capital, was profitable every year. If you look at some of NVR's markets, they have 20 or 30 percent market share in DC for example, Baltimore, Maryland, some places in Pittsburgh, high teen market share. It's got serious market shares in its market. Nationally, two percent market share or thereabouts. My point is, it's got a long, long, long runway of growth when it decides to leave the East Coast. It's no further West than Indiana, Ohio, and Illinois. Everything else touches the East coast basically. When it decides to go to the other 2/3 of the country, it's just got a massive runway of growth.
The other thing is during these downcycles, Nick, that's when it turns up the speed. It's patient during upcycles and then very aggressive and adaptable during downcycles. During the GFC global financial crisis, it entered six new markets, when, like I said, everyone else is struggling to survive, and it bought back massive amounts of cheap stock. In December 2010, I'm using that date because 2008 and 2009 were really bad parts of the downcycle. Coming out of the downcycle at 6.2 million diluted shares outstanding in 2010. Bought in 10 percent of its stock in 2011, bought in nine percent of its stock in 2012, it bought back another 10 percent of stock in 2014. More recently, it's only been buying back two or three percent of shares per year because its stock prices is much higher. But when its stock price got crushed with the rest of the industry, it used its profitability and its cash flows that its competitors did not have to enter new markets, six of them, and to reduce the shares outstanding by nine or 10 percent every year during the worst of the financial crisis. Most businesses do the exact opposite, Nick. They invest when times are great, they buy back stock when its stock is expensive. NVR's ability to shift its speed up and down based on market conditions, it's part of its culture. You can't do that. It's got to be ingrained in that corporate DNA. Most companies are grow baby grow until something bad happens. Not NVR. Really, really patient in up markets, and then puts the pedal to the metal in down markets, whether it's entering new markets, making acquisitions, which they don't make a lot of, they've only made three in 20 years, or buying back stock at bargain, basement, fire sale, stupid prices.
