Toll Brothers vs. NVHomes: Game on, Porter

A few days ago, I did something analysts probably shouldn’t do.

I praised a homebuilder on X.

Specifically, I highlighted Toll Brothers (TOL), the subject of two recent Wide Moat Research articles. The last one is titled “Toll Brothers: Luxury is the moat.”

That caught the attention of my friend and fellow financial publisher, Porter Stansberry. And he made it clear he doesn’t share my opinion:

So I did the only thing a mature, level-headed, confident investor could do.

I took him up on his bet.

My money is on Toll Brothers. His is on NVR, Inc. (NVR), and we’ll see which one wins out at the end of 10 years.

The starting date, for the record, was October 6, 2026. The finish date is October 6, 2036. And we’ll check in every year with published updates.

What we’re primarily looking for is total shareholder return, including reinvested dividends. That’s important since Toll Brothers pays a dividend, whereas NVR does not.

But we’ll also be evaluating:

Because, on October 6, 2036, I don’t just want to know who won. I want to know why.

To be clear, Porter’s pick is an exceptional company. I’d even say he chose the most formidable homebuilder in the industry.

But that’s why this wager is so interesting. Bear with me while I explain…

Like me, Porter understands NVR’s very attractive differences compared to its peers.

The company operates multiple brands that serve different parts of the housing market. Ryan Homes, for one, primarily builds for the average homebuyer, including first-time owners and homeowners looking for more space.

Then there’s NVHomes, which serves a more elite crowd. And Heartland Homes does the same, only in western Pennsylvania specifically.

Regardless, NVR relies heavily on lot purchase agreements (LPAs), where it has legally contracted claims to land but doesn’t actually own them. So it doesn’t have to worry about holding properties it can’t profitably build on.

This strategy makes NVR a capital-efficient compounding machine, generating 16.1% annualized EPS growth since January 1, 2010. Whereas Toll Brothers has actualized only 10.5%.

That’s part of the reason Porter is so confident.

But part of the reason I’m so confident is that we’re not starting out in January 2010. And that changes the picture considerably.

The picture actually started changing 10 years ago, with NVR’s EPS compounding at about 14.4% annually since January 1, 2016… while Toll Brothers’ was 18.8%. And I’m counting on that continuing from here.

Porter clearly isn’t. He’s critical of traditional homebuilders since they can suffer intensely from owning too much land when the housing market stagnates.

I get that. But so does Toll Brothers, and it’s been working hard to rise above that issue.

We can see that in how it controlled roughly 59,200 home sites in fiscal 2019, 62% of which it owned. The other 38% were optioned.

As of last fiscal year, however, Toll controlled about 76,100 sites, with 43% of them owned and 57% optioned. In other words, it added 17,000 properties to its pipeline while still reducing its actual proprietorship.

That’s impressive.

None of this is to say it will obtain NVR-like status for capital efficiency. Then again, I don’t want Toll to become a copycat company.

It actually has a lot of competitive advantages from its current way of acquiring, entitling, and monetizing land. Toll Brothers is exceptionally in tune to factors such as scarcity, zoning, entitlements, and location.

It’s just a matter of balancing those advantages with healthy capital allocation practices – which it seems to be doing quite well.

I already mentioned how NVR has a luxury brand. Two of them, in fact.

But that’s where Toll really shines. Because that’s all it does, catering to customers who have higher incomes or greater accumulated wealth. Therefore, they’re far less worried about mortgage rates.

They’ve got the ability to either put down large downpayments or buy homes outright. So Toll Brothers isn’t hurting how its “average” peers are these days.

It also has brand equity, which isn’t common among homebuilders. This isn’t an industry where company names tend to stand out. There are no labels or icons to stamp on the finished product.

Yet people looking for new luxury homes still gravitate toward Toll Brothers anyway. They know it builds, builds well, and caters to customization requests without muss or fuss.

That reputation is so stellar, in fact, I’d even call it a moat.

Better yet, it’s a moat at a discount.

NVR, for its part, is trading at 15.9x earnings. That makes for a nice entry point considering its historical norm of 18.7x.

But Toll is trading at 10.5x instead of its historical norm of 17.5x, making for a much greater discount. So there’s much greater room for share price appreciation.

There’s also much greater room for dividend compounding since, as already noted, Toll has one and NVR doesn't.

To be clear, it’s yielding just 0.75% at last check. But the amount itself is growing, from approximately $0.24 per share in 2017 to $1.03 in 2026.

That’s a 17.6% compound annual growth rate (CAGR), meaning the dividend has more than quadrupled in the last nine years. Yet it still has more than enough capital to build new homes, control land through options, repurchase shares, and otherwise grow its business.

NVR’s shareholder-return machine is primarily – even overwhelmingly – driven by buybacks.

Toll gives me buybacks alongside a quickly growing dividend. Which, remember, counts in the wager.

Analysts expect NVR’s EPS to grow around 12% in 2027 and 5% in 2028. For Toll, they expect about 9% and 15%, respectively.

That means roughly 17.6% cumulative EPS expansion for NVR and 25.4% for Toll.

While those estimates will undoubtedly change from here, that’s still a clear difference in my favor.

Yes, NVR has the obvious edge when it comes to its capital-light model. Its EPS record since 2010 is superior. And it has a slightly better credit rating as well.

But Toll Brothers is trading at about a 34% lower earnings multiple at our starting line. All by itself, that’s a huge advantage.

Yet it’s not all by itself, since Toll Brothers also offers:

So I’m more than willing to put my money where my mouth is on a Toll Brothers vs. NVR bet.

Game on, Porter. Game on.

That’s my analysis, and I’m sticking to it.

Happy SWAN Investing!

Brad Thomas,
Editor, Wide Moat Daily