NVR, (NVR) one of America’s leading homebuilders, operates in 33 metropolitan areas across 14 states east of the Mississippi River. The company builds single-family detached homes, townhomes and condominium buildings under three brands, Ryan Homes, NVHomes and Heartland Homes. In addition to building and selling homes, NVR provides a number of mortgage-related services for its homebuyers.

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Market Leader

Based in Reston, Virginia, NVR is one of America’s leading homebuilders. Its Ryan Homes brand was founded in 1948 in Pittsburgh, Pennsylvania, to provide housing in the booming postwar economy. Ryan Homes has constructed more than 440,000 homes and markets primarily to first-time buyers. The NVHomes brand, established in 1980 in Northern Virginia, offers additional architectural details and designer elements and has earned a reputation for both quality and value. Heartland Homes, founded in 1984, builds primarily luxury homes in the Pittsburgh metropolitan area. areas accounted for about 34% of NVR’s homebuilding revenues. As of 3/31/21, NVR’s homebuilding segment accounted for 96% of revenues and the mortgage banking segment accounted for 4% of revenues. Housing is primarily constructed on a pre-sold basis. NVR’s lot acquisition strategy is predicated upon reducing risk associated with direct land ownership and development. The company typically acquires finished building lots from third party land developers pursuant to fixed price finished lot purchase agreements. This strategy allows NVR to maximize inventory turnover while minimizing market risk and of return on equity and total capital. In addition to utilizing a conservative lot acquisition strategy, NVR focuses on obtaining and maintaining a leading market position in each market it serves, thereby gaining valuable efficiencies and competitive advantages. This strategy contributes to minimizing adverse effects of regional economic cycles and provides good growth opportunities within local markets.

Robust Cash Flow

During the first quarter, NVR generated $325 million in free cash flow, representing over 130% of net income. NVR’s robust free cash flow allows it to fund growth while returning cash to shareholders. Though NVR does not currently pay a dividend nor does it have plans to do so, it has historically returned a substantial portion of excess cash to shareholders via share buybacks. Management views the share repurchase program as a key component to accomplishing its primary goal of creating increases in shareholder value. Over the past five years, NVR has repurchased nearly $3 billion of its shares.

During the past quarter, NVR repurchased about 86 million shares of its common stock for $377.4 million or at an average price of $4,362 per share. NVR’s Board of Directors recently authorized the repurchase of an additional $500 million of its outstanding common stock. The company ended the first quarter with $2.8 billion in cash, $1.5 billion in long-term debt and $3.0 billion in shareholders’ equity on its sturdy balance sheet.

Profitable Growth

NVR has generated solid growth over the past five years with revenue compounding at a 7% annual rate and net income and earnings growing at 21% and 22% annual rates, respectively. NVR’s profit margin increased from 7.3% to 11.9% in the past five years aided by a lower tax rate from the tax cut enacted in 2017. Over the last five years, the company’s return on shareholders’ equity has averaged an outstanding 35%, demonstrating the high profitability of the business.

Strong Demand

Strong demand for new homes continued through the first quarter of 2021, driven by historically low mortgage interest rates and low housing supply. This has led to strong sales absorptions and rising home prices, as well as increased construction activity and demand for building materials. For the first quarter, NVR reported a 29% jump in revenues to over $2 billion with net income and EPS each rising more than 40% to $249 million and $63.21, respectively. New orders increased in the first quarter by 26% to 6,314 units with the average sales price rising 10% to $410,500. The backlog of homes sold but not settled as of 3/31/21 increased by 42% to 12,791 units and increased on a dollar basis by 51% to $5.2 billion. Long-term investors seeking a firm with a strong foundation should consider NVR, a high-quality market leader with strong brands, robust cash flow and profitable growth. Buy.