NVR
NVR, Inc.
stock NYSE

For me personally it is not a cyclical bet, it’s a bet on the improved economics of the business model and the long term demand. Homebuilders historically had so much debt and capital tied up in raw land they didn’t earn great returns. The more capital light business model that NVR has proven out is capable of earning far better returns. Look at the 10 year eps and FCFPS growth of NVR, the housing market is in a terrible place but the 10 year average eps and FCF growth are both over 20%. That is because it is a fundamentally better business model.
As far as competitors, the large home builders are taking market share/buying out the thousands of local homebuilders around the nation, and there is more than enough long term demand.
Lennar does have a differentiated model with their standardized housing plans that give them scale discounts and quick turnaround, but even still I don’t think they need to necessarily outcompete the other big players.

Over the next few months, I plan to post about every holding in my portfolio. See my previous post for my overview of Coupang.
Business overview:
Lennar is one of the largest homebuilders in the nation. Their "secret sauce" is that they use standardized plans to build homes. Basically, there are a variety of layouts they build that allow for customization but with similar materials, which allows them 2 advantages 1. they are able to use their scale to purchase cabinets, fixtures, flooring, etc at huge discounts; 2. the standardization helps their build speed. Lennar is able to turn inventory faster than competitors. One of the best parts of this business model is that both 1 & 2 become increasingly true as they continue to scale. Basically, as the business continues to grow, their competitive advantages continue to strengthen
Recent changes:
Historically, homebuilding has been a solid if unspectacular business; however some recent changes to the business model of several of the major players are worth discussing. In the past, home builders held massive amounts of land on their balance sheet and often took on excessive debt to do so, essentially combining the homebuilding business with volatile raw land speculation. Lennar has followed the lead of NVR and DR Horton (also interesting stocks), and spun off the land holdings into a separate entity (Millrose Properties). Instead, Lennar now has a net cash position and a much more capital-light structure. They own options on the land, have a very strong balance sheet, and have been buying back stock like crazy.
A big part of my thesis is these positive changes to their business model are currently being masked by the lul in the housing market
Why I am buying now:
I have no idea when the housing market will rebound, and it may well get worse before it gets better. What i do suspect is true is that overall the US housing market is undersupplied on homes. Most estimates I have seen are that the US is currently undersupplied by somewhere in the 2 to 10 million range. While rates are suppressing the demand (and rates may go up again and continue to dampen the demand) i suspect it is highly likely that sometime in the next 3-5 years we will see an up cycle in the market again. And while this business will continue to be cyclical, I suspect the structural changes will make this a company worth holding through the cycles anyway.
Valuation:
I am a big believer that valuations are only approximate and you can only hope to be directionally accurate ("You don't need to know a person's weight to know they are fat"-CM), but here is my shot at it.
Current TTM Revenue is 32.74 Billion. I expect 5% annual revenue growth for 5 years, a 12% terminal net margin (cyclical rebound + change in business model), and 4% annual share reduction.
I am very conservative with my discount rates and shoot for a 15-20% annualized return. With a 15% discount rate and 16x P/E ratio for fair value, the current per-share value is 203.7 per share. I feel my estimates are pretty conservative, and the true fair value is probably in the 200-300 range.

For me personally it is not a cyclical bet, it’s a bet on the improved economics of the business model and the long term demand. Homebuilders historically had so much debt and capital tied up in raw land they didn’t earn great returns. The more capital light business model that NVR has proven out is capable of earning far better returns. Look at the 10 year eps and FCFPS growth of NVR, the housing market is in a terrible place but the 10 year average eps and FCF growth are both over 20%. That is because it is a fundamentally better business model.
As far as competitors, the large home builders are taking market share/buying out the thousands of local homebuilders around the nation, and there is more than enough long term demand.
Lennar does have a differentiated model with their standardized housing plans that give them scale discounts and quick turnaround, but even still I don’t think they need to necessarily outcompete the other big players.

Over the next few months, I plan to post about every holding in my portfolio. See my previous post for my overview of Coupang.
Business overview:
Lennar is one of the largest homebuilders in the nation. Their "secret sauce" is that they use standardized plans to build homes. Basically, there are a variety of layouts they build that allow for customization but with similar materials, which allows them 2 advantages 1. they are able to use their scale to purchase cabinets, fixtures, flooring, etc at huge discounts; 2. the standardization helps their build speed. Lennar is able to turn inventory faster than competitors. One of the best parts of this business model is that both 1 & 2 become increasingly true as they continue to scale. Basically, as the business continues to grow, their competitive advantages continue to strengthen
Recent changes:
Historically, homebuilding has been a solid if unspectacular business; however some recent changes to the business model of several of the major players are worth discussing. In the past, home builders held massive amounts of land on their balance sheet and often took on excessive debt to do so, essentially combining the homebuilding business with volatile raw land speculation. Lennar has followed the lead of NVR and DR Horton (also interesting stocks), and spun off the land holdings into a separate entity (Millrose Properties). Instead, Lennar now has a net cash position and a much more capital-light structure. They own options on the land, have a very strong balance sheet, and have been buying back stock like crazy.
A big part of my thesis is these positive changes to their business model are currently being masked by the lul in the housing market
Why I am buying now:
I have no idea when the housing market will rebound, and it may well get worse before it gets better. What i do suspect is true is that overall the US housing market is undersupplied on homes. Most estimates I have seen are that the US is currently undersupplied by somewhere in the 2 to 10 million range. While rates are suppressing the demand (and rates may go up again and continue to dampen the demand) i suspect it is highly likely that sometime in the next 3-5 years we will see an up cycle in the market again. And while this business will continue to be cyclical, I suspect the structural changes will make this a company worth holding through the cycles anyway.
Valuation:
I am a big believer that valuations are only approximate and you can only hope to be directionally accurate ("You don't need to know a person's weight to know they are fat"-CM), but here is my shot at it.
Current TTM Revenue is 32.74 Billion. I expect 5% annual revenue growth for 5 years, a 12% terminal net margin (cyclical rebound + change in business model), and 4% annual share reduction.
I am very conservative with my discount rates and shoot for a 15-20% annualized return. With a 15% discount rate and 16x P/E ratio for fair value, the current per-share value is 203.7 per share. I feel my estimates are pretty conservative, and the true fair value is probably in the 200-300 range.