NVR - NVR Inc.

[Gregmal]

The pitch is really complex.

 

It's a good if not great, proven capital allocator getting beaten up and thrown out because people apparently think no one will buy homes with a 5% interest rate...

 

I'm a buyer...

[voyager]

Also a buyer....

 

Besides a great business at a reasonable price, you also get the potential of Amazon moving to DC for free. 

[Spekulatius]

I agree on NVR being best in class, due to their unique business model not owning any land. FWIW, decently managed home builders TOL and LEN trade around tangible book and PE‘s  ~ 7x. I don’t recall them ever being that cheap, except during the financial crisis, when they were bleeding losses. We are far from that. Mr. Market hates cyclicals right now.

[orthopa]

Looking at NVR but Jeld wen guiding down.  https://finance.yahoo.com/m/02a54d85-5879-3df8-92ba-52ed74b28a33/jeld-wen-shares-drop.html

 

something is up with housing...

[reader]

Mr. Market doesn't look favorably on NVR's Q3 earnings

 

https://seekingalpha.com/pr/17304974-nvr-inc-announces-third-quarter-results

 

 

 

Interesting podcast and write-up by Alex Middleton on SA 

 

Value Stocks Episode 7 - NVR

 

https://seekingalpha.com/article/4211683-value-stocks-episode-7-nvr-podcast

 

https://seekingalpha.com/article/4211889-40-percent-drop-nice-nvr-still-trading-intrinsic-value

 

[no_free_lunch]

Has anyone looked at the stock option grants to management?  To me it is enough to kill the thesis.  Over the last 2 years they issued something like 300k options which is roughly 8% of the total outstanding shares.  It is enough to negate all share repurchases over the last 2 years, which were substantial.  Consider that the company doesn't pay dividends and that over the past decade there has been no growth in total net income.  You are completely relying on share count reductions to drive the share price.  If we get diluted, where is the payoff?

 

Now I want to be objective here, so the pro to all this is that the options are not just share handouts, management needs to pay the current price and they have 5 years to exercise (as I recall) and the strike price on the options would have been higher for the most part than it is today.  So great.  I don't know exactly how to weight that out.  However, if you are buying into this you are counting on share price appreciation, and that appreciation is going to be muted by the additional shares the way I see it.

 

This whole thing feels like a bit too much of an equity grab for my taste.  Once again, I will watch from the sidelines.

[Broeb22]

Has anyone looked at the stock option grants to management?  To me it is enough to kill the thesis. 

 

Does it make sense to look at one year and draw conclusions about the management/investment? I know shares outstanding have declined significantly over time. I don't know if management has gotten greedier in recent years, other than the year you cite.

 

[KJP]

Has anyone looked at the stock option grants to management?  To me it is enough to kill the thesis. 

 

Does it make sense to look at one year and draw conclusions about the management/investment? I know shares outstanding have declined significantly over time. I don't know if management has gotten greedier in recent years, other than the year you cite.

 

The company has new stock incentive plans every four years, e.g., 2010, 2014, 2018.  They issue a very large number of options during the year in which the new plan is put in place, and then issue significantly fewer options in other years.  Some of the options are also subject to performance vesting, while others vest based solely on continued employment.  So, to get a fair picture of option issuance, you need to look at four-year intervals.  Is the issuance under the 2018 plan any different in size relative to shares outstanding than the prior issuances?

 

Also, what do you mean by income hasn't increased in a decade?  2018 will be far higher than 2008, though that's not a fair comparison because 2008 was near the bottom and included a large impairment charge. 

 

You're right that NVR is just now approaching the earnings it had in 2005, but that was the peak of a bubble.  In 2005,  there were 1.2 million housing completions in the three census regions in which NVR competes (Northeast, Midwest, South), and NVR closed on 13,800 houses.  In 2017, there were only 615,000 completions in those regions, and NVR closed on over 15,900 houses.  So the company has had massive market share gains.  The last  year that completions were comparable to 2017 was 2008, when completions in those three regions were 629,000.  As I noted above, NVR is far more profitable today and has a far greater market share today than it had in 2008. 

 

 

[no_free_lunch]

I agree that the huge option grants are a one-off but that is the most recent history that we have.  It still feels too much for a company with an $8B market cap.  I will also stand by my comments that income hasn't grown in a decade, because it is lower than 2006. I guess we can go letter of the law and say it hasn't grown in exactly a decade since 2008 was a slump but when we look back MORE than a decade earnings are down.  I get that we are comping to a record high period but nevertheless why is management rewarding themselves so much?

 

I just think of this as a commodity business where NVR has perhaps a better strategy and management.  There is not much moat and we are dependent on the health of the housing market, which is difficult for me to predict.  I also think much of the increase in EPS is due to share repurchases, but they were perhaps able to take advantage of the reduce share prices over the past decade.  To me, it is a decent investment if you really trust management.  I can see US housing continuing to grow, the current numbers are weak historically so we could have reversion to mean, and NVR historically has done very well.  However it's still a commodity business and so as soon as I see management in the cookie jar I am out.

[KJP]

I agree that the huge option grants are a one-off but that is the most recent history that we have.  It still feels too much for a company with an $8B market cap.  I will also stand by my comments that income hasn't grown in a decade, because it is lower than 2006. I guess we can go letter of the law and say it hasn't grown in exactly a decade since 2008 was a slump but when we look back MORE than a decade earnings are down.  I get that we are comping to a record high period but nevertheless why is management rewarding themselves so much?

 

I just think of this as a commodity business where NVR has perhaps a better strategy and management.  There is not much moat and we are dependent on the health of the housing market, which is difficult for me to predict.  I also think much of the increase in EPS is due to share repurchases, but they were perhaps able to take advantage of the reduce share prices over the past decade.  To me, it is a decent investment if you really trust management.  I can see US housing continuing to grow, the current numbers are weak historically so we could have reversion to mean, and NVR historically has done very well.  However it's still a commodity business and so as soon as I see management in the cookie jar I am out.

 

You seem to be saying that management's recent compensation is out of line by asking "Why are they rewarding themselves so much?"  To determine how much stock comp is "too much," I'd look at historical practices and per share wealth creation over time.  You can compare the size of the 2018 grant to the size of the grants in 2002, 2006, 2010 and 2014 to see its size relative to historical practice.  You can then assess whether the compensation structure has "worked," i.e., has the company significantly grown per-share value over time, despite its heavy use of stock-based incentive comp? Put another way, is the 2018 grant some kind of extraordinary thing, or is it consistent with a regular, longstanding practice of using stock compensation as a large part of management compensation?  Also, note the strike prices of the options.  Is there any pattern of trying to game the grant prices? 

 

Regarding the company's operating performance, I agree that the company is dependent on the housing cycle, but there's nothing management can do to change that cycle.  So, I don't think you can judge management quality by comparing today's earnings to cyclical peaks.  Instead, I would look at how the company managed through the bottom of the cycle and where it is now, given that we appear to be somewhere around mid-cycle, or perhaps below mid-cycle. 

 

As I noted earlier, management has significantly grown market share.  The table below shows NVR closings as a percentage of housing completions in the three census regions in which it competes:

 

1.05% 2000

1.09% 2001

1.14% 2002

1.18% 2003

1.14% 2004

1.15% 2005

1.22% 2006

1.46% 2007

1.71% 2008

2.25% 2009

2.55% 2010

2.39% 2011

2.57% 2012

2.69% 2013

2.46% 2014

2.66% 2015

2.60% 2016

2.60% 2017

 

As you can see, they the big growth in share was 2006-2010, i.e., during the very deep trough years.  I believe they were able to do this because of their capital and cost structure.  As other homebuilders struggled with solvency, NVR was able to take share and has maintained that share on the upswing.  That looks like strong management to me.

 

With respect to profitability, I would compare today's margins to historical margins the last time we were at this level of housing completions for any significant period of time (not 2008, because that was the middle of a collapse -- I think you have to go back to the 90's). 

 

At the end of the day, I agree with you that selling new houses is a commodity business.  So, being low cost is essential.  NVR's strategy seems to be aimed directly at that by concentrating geographically to get local economies of scale and manufacturing large portions of their houses off-site, rather than doing pure on-site stick-built.  Combine that with a very prudently managed balance sheet and capital allocation strategy with respect to land, and you appear to have a management that understands the limitations of the industry that it's in. 

 

 

[no_free_lunch]

Thanks for your thoughts KJP.

 

The strike price of the options was advantageous for existing shareholders.  I ball parked the strike at $3k, vs $2.4k current price.  So they did at least choose a high point in the price to issue at.

 

I will keep watching this one for now.

[KJP]

NVR is up ~65% from the late 2018 low.  I have it at about 14x EBIT and 18x earnings, with new bookings slowing down and being weighted more toward less profitable houses in the Southeast.  So, I think it's now somewhere around fair value.

[Gregmal]

NVR is up ~65% from the late 2018 low.  I have it at about 14x EBIT and 18x earnings, with now bookings slowing down and being weighted more toward less profitable houses in the Southeast.  So, I think it's now somewhere around fair value.

 

Yup, yup.... this and LGI Homes (the not so pretty one) up massively in a few months. But value investing is dead...

[wolverine890]

Is there liquidity in this name?

 

I ask because the underlying business fundamentals shouldn't be hurt by the virus? I would think buying a new house is nothing like buying an existing house in terms of social distancing. Also, NVR gets paid before they build.

 

Even if construction stops for awhile, it would just be pushing cash flows down the road. It wouldn't hurt them? Or am I thinking about this wrong?

[coc]

Is there liquidity in this name?

 

I ask because the underlying business fundamentals shouldn't be hurt by the virus? I would think buying a new house is nothing like buying an existing house in terms of social distancing. Also, NVR gets paid before they build.

 

Even if construction stops for awhile, it would just be pushing cash flows down the road. It wouldn't hurt them? Or am I thinking about this wrong?

 

NVR has a very robust business model. I would agree that it’s a slow down and not a long term problem.

 

However I recommend closet evaluating their earnings and the amount of stock the company issues to calculate their real earnings. I don’t believe the reported numbers are right.

[KJP]

Is there liquidity in this name?

 

I ask because the underlying business fundamentals shouldn't be hurt by the virus? I would think buying a new house is nothing like buying an existing house in terms of social distancing. Also, NVR gets paid before they build.

 

Even if construction stops for awhile, it would just be pushing cash flows down the road. It wouldn't hurt them? Or am I thinking about this wrong?

 

If we're headed toward a recession, then new home sales likely will fall, with the depth likely correlated with the severity of the recession.  If the depth and duration of any recession is significant, than NVR will suffer some permanent losses (rather than just deferring sales into the future) due to their options on land expiring without purchase (and consequent writeoffs).  You can see that happening if you look at the post-2008 financials. 

 

All that being said, NVR is a company I have my eye on.  I believe it has the right balance sheet and strategy (options to buy land, rather than carrying debt-financed land purchases on balance sheet) and very little debt.  That enabled it to take share during the aftermath of the GFC and I'd expect that to happen again in any additional severe downturn.  I haven't decided yet what my buy price would be though.

[KJP]

Is there liquidity in this name?

 

I ask because the underlying business fundamentals shouldn't be hurt by the virus? I would think buying a new house is nothing like buying an existing house in terms of social distancing. Also, NVR gets paid before they build.

 

Even if construction stops for awhile, it would just be pushing cash flows down the road. It wouldn't hurt them? Or am I thinking about this wrong?

 

NVR has a very robust business model. I would agree that it’s a slow down and not a long term problem.

 

However I recommend closet evaluating their earnings and the amount of stock the company issues to calculate their real earnings. I don’t believe the reported numbers are right.

 

What adjustments would you make to GAAP financials to account for the relatively large equity-based component of NVR's compensation structure?

[wolverine890]

Is there liquidity in this name?

 

I ask because the underlying business fundamentals shouldn't be hurt by the virus? I would think buying a new house is nothing like buying an existing house in terms of social distancing. Also, NVR gets paid before they build.

 

Even if construction stops for awhile, it would just be pushing cash flows down the road. It wouldn't hurt them? Or am I thinking about this wrong?

 

NVR has a very robust business model. I would agree that it’s a slow down and not a long term problem.

 

However I recommend closet evaluating their earnings and the amount of stock the company issues to calculate their real earnings. I don’t believe the reported numbers are right.

 

What adjustments would you make to GAAP financials to account for the relatively large equity-based component of NVR's compensation structure?

 

I would assume he would dilute their earnings by ~8% to account for the equity options outstanding? But i see two problems with that, and maybe i am thinking about this wrong. First, if this is a prolonged downturn, then most of that equity compensation isn't nearly as costly as it otherwise would have been. Second, I would think this downturn would provide the company with a great opportunity to repurchase their shares.

 

On a different note, during that last recession where home builders and banks were the primary target; they were hurt, but quickly recovered given their asset light business model. In fact, Lennar has been trying to move away from owning raw land for this very reason. I believe they had less than 10% of their home buyers cancel their contracts in 08/09 based on the high credit score of their base customers.

 

But more important than all of this, is that they seem like a company that is designed for downturns. Fragmented geographic customer base, low debt, and the ability to significantly redeploy capital and increase their market share. From 2006 to 2018 they went from ~1% of new home builds to ~3%.

 

The final thing i have been thinking about is that they were recently added to the S&P500 index. They aren't a very liquid stock. If the index is selling off then this would get disproportionately hurt...

[Guest roark33]

As per liquidity, I think you can already see that happening.

[coc]

Is there liquidity in this name?

 

I ask because the underlying business fundamentals shouldn't be hurt by the virus? I would think buying a new house is nothing like buying an existing house in terms of social distancing. Also, NVR gets paid before they build.

 

Even if construction stops for awhile, it would just be pushing cash flows down the road. It wouldn't hurt them? Or am I thinking about this wrong?

 

NVR has a very robust business model. I would agree that it’s a slow down and not a long term problem.

 

However I recommend closet evaluating their earnings and the amount of stock the company issues to calculate their real earnings. I don’t believe the reported numbers are right.

 

What adjustments would you make to GAAP financials to account for the relatively large equity-based component of NVR's compensation structure?

 

Sure, good question. I will "show my work" on this one and hopefully you guys find it useful.

 

NVR is actually quite an easy company to do this for, because their financials are simple and their capital allocation policy even simpler (use all cash flow to buy stock - every year going way back). Over the past ten years they have reduced their shares roughly from 6 million to 3.66 million outstanding, which is nice to see. About 5% reduction per year.

 

However, using their filings, you can see they actually repurchased on the open market 4.3 million shares. Shockingly, that means they issued almost 2 million shares to the employees on a starting base of 6 million.

 

The average buyback price was about $1,235/share. Net of cash inflows from exercise, they spent just over $4 billion for the decade buying stock. What does this mean to me?

 

It means to me that of the $4.1 billion of reported repurchases (almost an exact match to $4 billion of net income 2010-2019), only about $2.9 billion worked for the benefit of shareholders ($1,235 buyback price x 2.35 million shares actually reduced).

 

So their true "owner earnings" were 70% of what was reported. Again: 100% of earnings went to buybacks, and only 70% of buybacks stuck to shareholders' ribs. It is quite literally cash out the door -- if NVR didn't issue all that stock, they could have spent $2.9 billion on buybacks and sent the other $1.2 billion to shareholders, and have the same number of shares out today.

 

I know this will feel crazy high for some of you, but it is the truth. They only expensed about $45 million per year through the income statement.  That is clearly not correct.

 

You can do whatever you like with this to adjust going forward, but I would not just dilute the shares 8%, because NVR will be issuing a lot more over the coming decade. This is simply how they run the business.

 

They certainly have a great business model and also create value with repurchases.

[KJP]

Is there liquidity in this name?

 

I ask because the underlying business fundamentals shouldn't be hurt by the virus? I would think buying a new house is nothing like buying an existing house in terms of social distancing. Also, NVR gets paid before they build.

 

Even if construction stops for awhile, it would just be pushing cash flows down the road. It wouldn't hurt them? Or am I thinking about this wrong?

 

NVR has a very robust business model. I would agree that it’s a slow down and not a long term problem.

 

However I recommend closet evaluating their earnings and the amount of stock the company issues to calculate their real earnings. I don’t believe the reported numbers are right.

 

What adjustments would you make to GAAP financials to account for the relatively large equity-based component of NVR's compensation structure?

 

Sure, good question. I will "show my work" on this one and hopefully you guys find it useful.

 

NVR is actually quite an easy company to do this for, because their financials are simple and their capital allocation policy even simpler (use all cash flow to buy stock - every year going way back). Over the past ten years they have reduced their shares roughly from 6 million to 3.66 million outstanding, which is nice to see. About 5% reduction per year.

 

However, using their filings, you can see they actually repurchased on the open market 4.3 million shares. Shockingly, that means they issued almost 2 million shares to the employees on a starting base of 6 million.

 

The average buyback price was about $1,235/share. Net of cash inflows from exercise, they spent just over $4 billion for the decade buying stock. What does this mean to me?

 

It means to me that of the $4.1 billion of reported repurchases (almost an exact match to $4 billion of net income 2010-2019), only about $2.9 billion worked for the benefit of shareholders ($1,235 buyback price x 2.35 million shares actually reduced).

 

So their true "owner earnings" were 70% of what was reported. Again: 100% of earnings went to buybacks, and only 70% of buybacks stuck to shareholders' ribs. It is quite literally cash out the door -- if NVR didn't issue all that stock, they could have spent $2.9 billion on buybacks and sent the other $1.2 billion to shareholders, and have the same number of shares out today.

 

I know this will feel crazy high for some of you, but it is the truth. They only expensed about $45 million per year through the income statement.  That is clearly not correct.

 

You can do whatever you like with this to adjust going forward, but I would not just dilute the shares 8%, because NVR will be issuing a lot more over the coming decade. This is simply how they run the business.

 

They certainly have a great business model and also create value with repurchases.

 

That is one way to look at it.  NVR's GAAP stock-comp numbers on the income statement are required to be ex-ante estimates of cost and I believe use Black-Scholes .  You've looked at it from an ex post perspective, which includes the actual stock price movement (and accompanying buyback prices).  Until a few weeks ago, the last ten years had seen the stock go from ~$700/share to ~$4000/share.  I believe that would handily beat a Black-Scholes estimate, thus leading to exactly the ex post result you calculate, i.e., GAAP stock comp numbers underestimate the true cost/dilution of the equity comp.

 

The broader point implied by your analysis is also correct:  The greater the percentage of compensation that comes from stock comp (rather than cash), the greater the percentage of potential upside current shareholders are giving up.  The flip side, of course, is that the more equity comp you use, the less current cash costs you have, which can be a very good thing in certain circumstances.  In addition, if you have a price collapse, I think you'll find that prior GAAP years might ultimately overstate actual ex post equity comp costs (rather than understate them) as previously issued options either expire worthless or at prices below the Black-Scholes estimate.

[coc]

 

Sure, good question. I will "show my work" on this one and hopefully you guys find it useful.

 

NVR is actually quite an easy company to do this for, because their financials are simple and their capital allocation policy even simpler (use all cash flow to buy stock - every year going way back). Over the past ten years they have reduced their shares roughly from 6 million to 3.66 million outstanding, which is nice to see. About 5% reduction per year.

 

However, using their filings, you can see they actually repurchased on the open market 4.3 million shares. Shockingly, that means they issued almost 2 million shares to the employees on a starting base of 6 million.

 

The average buyback price was about $1,235/share. Net of cash inflows from exercise, they spent just over $4 billion for the decade buying stock. What does this mean to me?

 

It means to me that of the $4.1 billion of reported repurchases (almost an exact match to $4 billion of net income 2010-2019), only about $2.9 billion worked for the benefit of shareholders ($1,235 buyback price x 2.35 million shares actually reduced).

 

So their true "owner earnings" were 70% of what was reported. Again: 100% of earnings went to buybacks, and only 70% of buybacks stuck to shareholders' ribs. It is quite literally cash out the door -- if NVR didn't issue all that stock, they could have spent $2.9 billion on buybacks and sent the other $1.2 billion to shareholders, and have the same number of shares out today.

 

I know this will feel crazy high for some of you, but it is the truth. They only expensed about $45 million per year through the income statement.  That is clearly not correct.

 

You can do whatever you like with this to adjust going forward, but I would not just dilute the shares 8%, because NVR will be issuing a lot more over the coming decade. This is simply how they run the business.

 

They certainly have a great business model and also create value with repurchases.

 

That is one way to look at it.  NVR's GAAP stock-comp numbers on the income statement are required to be ex-ante estimates of cost and I believe use Black-Scholes .  You've looked at it from an ex post perspective, which includes the actual stock price movement (and accompanying buyback prices).  Until a few weeks ago, the last ten years had seen the stock go from ~$700/share to ~$4000/share.  I believe that would handily beat a Black-Scholes estimate, thus leading to exactly the ex post result you calculate, i.e., GAAP stock comp numbers underestimate the true cost/dilution of the equity comp.

 

The broader point implied by your analysis is also correct:  The greater the percentage of compensation that comes from stock comp (rather than cash), the greater the percentage of potential upside current shareholders are giving up.  The flip side, of course, is that the more equity comp you use, the less current cash costs you have, which can be a very good thing in certain circumstances.  In addition, if you have a price collapse, I think you'll find that prior GAAP years might ultimately overstate actual ex post equity comp costs (rather than understate them) as previously issued options either expire worthless or at prices below the Black-Scholes estimate.

 

(Sorry, wrote another message accidentally deleted - below is what I recall!)

 

We agree and disagree. You are of course right that my analysis is backward looking.

 

However there's a big real world offset which is that if the stock price is weak and the options expire out of the money, more options are issued, at a lower price. I believe the system is set up to get money in employees' pockets, plain and simple. If options keep expiring out of the money, employees will demand compensation in another form -- that's just my experience.

 

So if NVR had a weak stock in that period, I believe a huge number of shares would have made it out there anyways.

 

One could argue I'm understating the magnitude of the problem, because if they were buying shares below intrinsic value, they were equally issuing them to employees below intrinsic value.

 

Given that we're talking 1.95 million shares or thereabouts, this is the difference between NVR's $880 million of earnings giving current shareholders $238/sh or $550/sh. The stock would be worth more than twice as much!

[KJP]

 

However there's a big real world offset which is that if the stock price is weak and the options expire out of the money, more options are issued, at a lower price. I believe the system is set up to get money in employees' pockets, plain and simple. If options keep expiring out of the money, employees will demand compensation in another form -- that's just my experience.

 

So if NVR had a weak stock in that period, I believe a huge number of shares would have made it out there anyways.

 

 

As I noted earlier in this thread, NVR issues a large number of options in four-year cycles, and then fewer options in other years.  Did management and the comp committee deviate from that cycle during the housing bust or otherwise issue "extra" options at low prices to make up for expiring worthless (or low value) options?  The stock also suffered a long, prolonged decline during the housing bust, going from ~875 in mid-2005 to the low 300's in 2009 and stayed under 850 until 2012.  Were any options recut during that period or did the employees and management take the hit?  More broadly, we have a relatively recent example of a substantial, prolonged stock decline.  What "real world" actions would you point to during that period to support your beliefs about NVR's equity compensation program?  I'm not saying you're wrong; I just don't recall such actions. 

 

You're plainly correct that the higher the stock price goes the more expensive prior options grants look.  But don't you want the share price to rise? 

[Kaegi2011]

Have been an admirer of the business for a long time, finally pulled the trigger on some today. 

 

Appreciate the folks highlighting the issue w/r/t the exec comp piece.  All are good points.  Thank you.

[coc]

 

However there's a big real world offset which is that if the stock price is weak and the options expire out of the money, more options are issued, at a lower price. I believe the system is set up to get money in employees' pockets, plain and simple. If options keep expiring out of the money, employees will demand compensation in another form -- that's just my experience.

 

So if NVR had a weak stock in that period, I believe a huge number of shares would have made it out there anyways.

 

 

As I noted earlier in this thread, NVR issues a large number of options in four-year cycles, and then fewer options in other years.  Did management and the comp committee deviate from that cycle during the housing bust or otherwise issue "extra" options at low prices to make up for expiring worthless (or low value) options?  The stock also suffered a long, prolonged decline during the housing bust, going from ~875 in mid-2005 to the low 300's in 2009 and stayed under 850 until 2012.  Were any options recut during that period or did the employees and management take the hit?  More broadly, we have a relatively recent example of a substantial, prolonged stock decline.  What "real world" actions would you point to during that period to support your beliefs about NVR's equity compensation program?  I'm not saying you're wrong; I just don't recall such actions. 

 

You're plainly correct that the higher the stock price goes the more expensive prior options grants look.  But don't you want the share price to rise? 

 

They issued 387,000 options in 2005 at $743, and then 290,000 three years later in 2008, at $515. That's my point -- they issue them regularly, and at whatever price the stock is at the time -- the stock decline means one or two years of options are forfeited, but not the new ones, which are even more valuable than the expired ones (because the price is down). The options from 2008 forward have pretty much all been in the money, as you know.

 

But look, the only way to actually know the value of an option is indeed in hindsight. NVR is a valuable, growing company -- it's just a lot less valuable if they issue 5% of the company in options every year. We agree that a successful company will end up having very valuable stock options -- that's exactly my point. I don't believe Black Scholes captures that at all.

 

As an example, in 2014 they issued a huge package (almost 700k shares, or 17-18% of the company) of 5-year options at $1,095/share. Black Scholes said they were worth $236 - a breakeven of $1,331. I don't agree with that. The company earned $200 per share in 2019 on the 2014 share count.

 

Here's my question: Would you rather NVR issue 150k options this year at $2,250 or pay the employees $90 million cash? Because that's about the B-S value. I sure as hell would prefer they used cash.