D.R. Horton: Building a New Model - [Business Breakdowns, EP.154]

27:00But just for example, right now, it's hard to get transformers. So you can't sell a house and you can't build a development unless you can get transformers. So in home building, if there's one material or one part of the labor or one part of the process of getting land developed that you can't do, you can't build a house. The way we see things, we think that the number of housing starts, and that's complete units, including apartments, can go back to maybe $1 .617 million per year, but can't get much higher. Since the shortage is three or four million housing units in the United States, and the normal demand is $1 .5 million, if you could get to $1 .7 million, you'd be reducing the shortage by $200 ,000 a year.

27:43It would take 20 years to eliminate the shortage. So this is a very different and optimistic scenario for the homebuilders. They really have a long runway ahead of them where demand should exceed supply. And an important consideration is, yes, the homebuilding industry is cyclical, but people have to live somewhere. And if you're married and you have a child, you don't want to live with your mother -in -law. At least I don't want to live with my mother -in -law, and you probably don't either, Matt. So there is this basic demand of 1 .5 million a year. It could be a little more some years. It could be a little less some years.

28:19But this is a unique feature about the home building industry. You've got a firm demand. And because we are so underbuilt, the home builders should do very well over the next five or 10 years. And it is cyclical, but one has to be very much less concerned about a down cycle of any long period of time. Yes, interest rates could spike to 10%. And for a while, it could be sticker shock. But eventually, somebody still has to own a house. And if you go back actually to the 1980s and 1990s, believe it or not, mortgage rates averaged 10%. About 1 .3 million housing units were built per year on average during that period of time.

29:01And the population of the United States at that time was 250 million. If you adjust the population of the United States to the 330 million today, that's equivalent of a demand of 1 .8 million housing units per year with 10 % mortgage rates. So you can see this, the basic demand is there and was there during a 20 -year period of time of high mortgage rates and lack of affordability. So yes, you could get sticker shock. Yes, you could get a recession. And there might be a short period of time when housing turns down. It is cyclical, but the long term looks very, very positive. And the large home builders not only have the tailwind of strong demand, but they continue to gain market share.

29:46So this becomes a growth industry. Very interesting thesis just laid out right there and a lot of different angles that I want to cover. For someone like D .R. Horton, when you have this type of environment where there's a shortage of supply and there is still strong demand and a need for housing. Do they benefit from what would basic economics would say, strong demand, capped supply, pricing would go up? Are they beneficiaries of pricing going up in the financial model of D .R. Horton? Do they capture a lot of that economic benefit? Pricing has gone up a lot. There were supply constraints in 2021.

30:25And in 2022, two, prices went up quite a bit and interest rates are up. So affordability is an issue. And that limits, I think, the amount of price increases they can get going forward. But I don't think we need them. I think if prices stay where they are for the next couple of years, and then probably prices will increase with inflation as they have in the past, 2 % per year, 3 % per year, 4 % per year. But we're not counting on that in our models for the next several years. And you did mention before there's challenges with labor and just general supply their beneficiaries relative to the rest of the market, given their size.

31:01So there's economies of scale. But do they get squeezed on the margin side if you have pressures on the cost side of the equation, but maybe an inability to pass through on price? What has that looked like maybe the 2020 through today timeframe in terms of the margin profile of the business on those homes? They, I think, will be able to maintain their margins, not increase their margins, but maintain their margins. And that's our premise. Costs are going up, but they are getting some price release. Put it this way. There was a test. The test was last year. Mortgage rates about two years ago were about 3%.

31:36They went as high as 8 % after prices of houses increased substantially. And there was sticker shock. Demand for houses temporarily went down sharply. The home building industry did very well. They held their margins. And yes, they sold fewer houses in 23 than they did in 21, 22. But their earnings were very strong. They were put to the test and they passed the test. If you speak to the companies, they are getting increased efficiencies and they are being able to offset a lot of the costs. The biggest cost concern would be land. I think in terms of materials, material prices had gone up very sharply in 21 when there were shortages.

32:16And material costs, if anything, are coming down a little bit. If you look at labor, there was a shortage of labor in 21 -22. And contractors were charging more than they had been. And labor costs have stabilized. Land costs are still going up. Royal land is about 10 % of the price of a house in costs. And developed land is about 20%. You buy land for 10 % and then you spend another 10 % of the price of the house developing the land. So that 20 % of the cost of the land is still going up, but they're offsetting it heavily through efficiencies. The big companies are getting better and better and better at manufacturing homes.

32:54It's just mass production. I think you mentioned it before, but can you remind me that normalized margin that you would assume for this business going forward? It's about 16%, which was the average of Lenar and Horton for the past five years. And if you break it down a little more, I think the gross margins for Horton should be about 23 .5%. I think they'll be about that this year. This is higher than they were 10 years ago, but they are benefiting tremendously from efficiencies of scale. They can buy their land better. They are able to offer advantages to their subcontractors, so the subcontractors can pass some of that on to them.

33:37When they go to buy materials, they're buying in large quantities. Horton buys its appliances from Whirlpool. They're now buy 90 ,000 dishwashers a year. They used to buy 30 or 40 ,000. They're getting a better price. So I think a lot of the gains of gross margins are permanent and they may even go up from here. So I would look at gross margins staying around 23 and a half. If you go back pre -COVID, they were about 21%. So they've gone and increased about two and a half percent. And that is largely scale. It's some efficiencies. They're just doing things better. When you look at SG &A, which for Horton should be about 7%.

34:14It may be a little higher than that this year because they're growing rapidly. It used to be 9%. And that simply is scale. They used to build 40 ,000 houses. They now build 90 ,000 houses. They obviously don't need more than twice. They don't need twice as many employees, et cetera. That is pretty permanent. So I look at it that their margins should be 23 .5%, less 7 % SG &A, and maybe a little over 16%. And we don't increase that. They may get lucky because of power in certain markets, get certain advantages and increase their margins from here. But we're not building that in any of our models.

34:49We're sticking to about a little over 16%. From a top line perspective, there's going to be cycles. But you mentioned this longer term tailwind in the market. How do you frame the revenue opportunity or revenue growth over a normalized period? So Horton says for the foreseeable future, they'll be able to grow close to 10 % per year in units. And if you look at it, a large percentage of that, not all, because I think the housing industry is not returned to normal yet. We're operating in terms of single -family homes being sold, not the 1 .5 million, but just single -family homes being sold. It was about 660 ,000 last year, and we think normal is about 825 ,000.

35:33It should get back at least to normal, and if the capacity is there, maybe something above normal. But if you look at market shares and you go back to 2013, Horton was building 5 .6 % of those single -family sales. If you go back to 2018, it went to 8 .4%. And if you go to 2023, it was 12 .5%. So they have more than doubled their market share in 10 years. And there's no sign that that is being diminished. I would say that small builders today have had problems getting supplies, including labor. If there's shortages, the large home builders are going to get the refrigerators. They're going to get the transformers.

36:17They're going to get the contractors. And with the regional banks pulling back, many of the very small builders have been dependent on the regional banks for financing. And that financing is becoming more restrictive. So I think you're seeing, if anything, an acceleration of problems for the very small builders. And I think the market share gains will continue. So Horton looks in terms of units at something close to 10 % per year. We use 8 % in our model, not including any price increases for the next several years in our model, but it then should go up to 2 % or 3 % or 4%. And that would take growth, everything else being equal, up to 10%, 11%, 12 % or something like that.

36:57In addition to that, they are generating large amounts of excess cash and they're buying back stock. Now, Don Horton is more conservative, and I have this argument with him, than I am. Right now, he has more cash and debt on the balance sheet for their home building operations. They have a few other operations. They will keep building cash to the point, I don't know what. They probably are buying back 2 % to 3 % of their shares each year. They should be buying back more. but if you take, and I'll be conservative here, 8 % unit growth for the next several years, no price appreciation. So top -line growth of 8%, 2 % to 3 % share repurchases.

37:34You get something like 10%, 11 % gains in earnings per share per year. They earned $13 .82 last year and 10 % gains would take you to $18 per share in 2026. We look at two years. So we're looking at 2026 at this point. plus the fact that they are building a balance sheet that's going to have too much cash on it. Incidentally, Don Horton keeps on his desk a model of NVR as a company and the price of their shares and the P ratios. Because you have a situation, and this really is the bottom line to the home builders, you've got a situation today where Horton is probably going to earn about $14 .50 this year versus the $13 .82 last year.

38:14And the stock is selling at 10 times earnings. So NVR is on a 16 times earnings. NVR is an excellent company. Horton is probably equally or more excellent because they are much larger, have efficiency to scale and geographical reach. NVR is heavily concentrated in the Washington, D .C. area. I think the opportunities for growth for Horton are much greater. And if you look at market share, I mentioned between 2013 and 2023, Horton's market share went from 5 .6 % of houses being sold to 12 .5%. During that same period of time, NVR's market share only increased from 2 .8 % to 3 .1%. They grow much slower.

38:57They just are not expanding geographically. So it's an excellent company. But my argument is, if NVR sells at 16 times earnings, Horton and Lenar, being the two largest homebuilders, being superbly positioned, should sell at 16 times earnings. And let me look at it another way. Over the last 50 years, the stock market has sold at an average of 16 times earnings. It sells at more than that today. The question is, is Horton, in terms of its growth, in terms of its management, in terms of its strength, an average company or, in my opinion, a better than average company? It's got higher than earnings growth potential than the average standard and poor's 500 stock.

39:37It's got a pristine balance sheet with more cash than debt. It's got a very large free cash flow, cash that I don't even know what they're going to do with the cash. And in addition to that, by definition, almost the management is excellent because if the manager wasn't excellent, Horton wouldn't have become the company it was today. In a qualitative and quantitative sense, it deserves to sell at more than 16 times earnings. And that is our case. If you look out just to see how much money you can make. Our projection for 2026 is $18 a share, which is 10 % growth. And again, that could be conservative.

40:09If the stock sold a 16 times earnings, it's $288 stock. Stock's $145 today, and you get $1 .20 dividend. So you come close to doubling your money. And if the stock happened to sell a 20 times earnings, it's a $360 stock. It becomes really a home run investment. Exactly what I loved about your book was how simply you laid out the thesis, relative to the market, average companies, above average companies, with all the numbers to back it up. I want to get into that valuation gap. But one last piece on the income statement, because I want to transition a little bit to cash flows in the balance sheet.

40:46For revenue growth, what you mentioned before was when they're making acquisitions, it's typically land. So am I right to think that all of that revenue growth is generally coming from their own production? Maybe it's land that they purchased years ago, but it's not like they're buying companies. There's not much inorganic M &A growth assumed in that number. Is that the right takeaway? That's exactly correct. If you look at the number of acquisitions they've made over the last several years, they've been very few and tiny, so tiny that most of them aren't even disclosed. It really is land acquisition.

41:19There's some person out there that's been building houses for the last 15 years and has 40 acres outside Jacksonville. It's an individual. It's Matt and company. They go to Matt and Matt is, I'm getting old and I don't want to take the risk of borrowing this money. And they say, I'll buy the land from you. I'll buy Matt and company land. And they buy it. And it never even shows up in a 10K statement. That's typically what's going on. The companies are saying we have no need to buy anybody who is large at all. We will continue to buy land via buying small companies. And there's an accelerated opportunity to do that today because of the difficulty of getting supplies and labor, and particularly because of the financial situation with regional banks.

42:06So you may see some accelerated growth from Horton and Lenar, and maybe that is why they're keeping so much cash on the balance sheet, just because if they see land opportunities, and they've mentioned that to me. But I'm still critical of their balance sheets. They're too strong. Incidentally, I'm a very conservative person. And usually when I criticize managements, it's for having too much debt. We just sold the shares of Whirlpool about a year ago because they made an acquisition and put too much debt on the balance sheet. So it's ironical that I am here speaking to Don Horton and saying, or to Stuart Miller and Lenar and saying, why do you have so much cash on the balance sheet?

42:42The siren goes off in your head when you find yourself on the other side of an argument that you're typically having. I want to get into the valuation gap. My initial instinct from hearing something like that is there must be a difference in the quality of earnings, NBR versus DR Horton and Lenar. And certainly that was potentially the case 10, 15 years ago. But as these business models have changed, the earnings conversion from those earnings per share into actual free cash flow. Is there a substantial difference in terms of earnings conversion at DR Horton versus at NVR today? NVR has been a master at developing land development companies that will develop the land for them and sell it to them exactly at the last minute before they're going to build a house.

43:35Do they own those companies? No, they don't. They just work out relationships with land developers. And there are contractors. If you're going to build an apartment complex, you're hiring somebody to build the road and build the electrical infrastructure and the plumbing, etc. that goes in before the apartment house is built. So they have developed those relationships over a very long period of time. They have developed them in this geographical area. They don't have them in other areas, which if they did expand would be a disadvantage. So NVR probably is, let me put it on a scale from one to 10.

44:1310 is asset heavy. One is asset light. So it used to be that Horton was maybe seven or eight or nine, relatively asset heavy. Today, Horton is two, maybe three, getting to two or maybe getting to one and a half. NVR is one. So NVR is asset lighter. So they do generate more cash, and they use that cash flow to repurchase shares, but they don't grow as quickly. So they're all set. And I would call it even. I wouldn't say NVR's model is better than Horton's. I wouldn't say Horton's model is better than NVR. Horton definitely is more of a growth model, and they're going to increasingly get efficiencies of scale compared to NVR.

44:56The bigger you become, the easier it is to get land, the easier it is to get contractors, The easier it is to get materials, because if I'm selling doors and there's a shortage of doors, I'm going to sell to Horton before I sell to somebody who's building 25 or 30 houses a year. I've got to take care of my very, very large customers. It's not quite apples and apples. It's maybe apples and pears. No, it's a very fair counter, not that you're suggesting negativity about NBR's model, but at least pointing out the land development company relationships and that there is a cap to where they have those relationships and the geographical exposure.

45:33It's not a point that I had previously heard, and it actually does, I think, highlight some of the benefits that D .R. Horton would have just in terms of how they're operating. When you previously mentioned that shift in mix where I think 25 % of land was optioned and today it looks more like 75%, is that the mix that you expect to be stable going forward? The percentage of land optioned has continued to increase over the years. I think when you get to 75%, it might go to 80%. I think for Horton, they want to have the land under their control owned before they start building the models, developing it with houses.

46:15So I think that they will always want to own some land. And there are certain areas of the country and maybe certain pieces of land where it's just better to own than to option, financially or otherwise. So I don't think they'll get to 95%. I think that they may get to 80 % or 85 % over a period of time. But their model already is so good. They had a 22 % return on tangible book value last year and 16 % margins and generated large amounts of cash flow and have excess cash. So you don't need to change the model at this point. You've got an excellent business currently. I should have done this earlier in the conversation.

46:53But just from the optioning of land versus the outright purchasing of land, the difference in terms of what that cost is to actually option the land. And obviously, the big cash outlay would come at the purchase time. But do you have a rough sense of what the expense is to option land? Yeah, I do. And the rule of thumb is it reduces gross margins by about 3%, the cost. And you can figure it out. They're paying the land bank about 11 % interest rate. And they do it for a certain amount of time. And the land is 10 % of the cost of a house, the price of a house. And developed land is 20, so you can figure out.

47:26They get virtually all of that back in lower interest expense. So for the home builders, when you look at gross margins, it is after interest charge to construction, in effect. So now that Horton, instead of having $3 billion of debt when they were much smaller, has virtually no debt and is getting interest income, their interest charge to construction has gone down by more than 2 % of the price of a house. So they have offset virtually all of the extra cost of optioning land. And of course, they have substantially reduced risk because if anything happened to the industry or if they had a piece of land that was really great, they thought, but then it didn't turn out to be so good before they bought it, they could not exercise the option.

48:14Now, that doesn't happen very often, but it is an advantage that reduces risk. Hedging in some ways. It is a hedge and the hedge has cost money. And bringing the other potential hedge into the equation is that you mentioned they still build a lot on spec. What type of risk does that bring into their business model? Is that different than what you see with a lot of the other home builders? And are there any themes or trends which would make building on spec more or less attractive? I think the old model was, Matt, you want to buy a house, come see the model. Okay, I need a 10 % deposit. I'll build a house for you and it'll be ready in nine months.

48:59And that model has become less attractive to the buyer because most people don't want to wait nine months and less attractive to the builder because it's a one -off type situation and they can't get the efficiencies of scale. So the spec model, I think, is increasing in popularity. It's almost 100 % of what Horton does. And the other builders from Lenar and Toll are going increasingly to spec. Now, the risk would be if they didn't have a good handle on demand and they were putting more foundations in the ground, more frames up than demand. But that really doesn't happen. They are starting houses and building them up.

49:41And normally the house is sold well before it is complete, in many cases before it's even framed or the wallboard goes in. If demand happened to turn down or if they're just building too quickly in any particular community, the weather's bad or something, they start slowing the process down and vice versa. So they have become pretty good at pacing the spec starts to demand. And it's somewhat seasonal. You start fewer during the winter because demand is slower during the winter. And the housing industry has the spring selling season, which supposedly starts at Super Bowl weekend. But of course, Super Bowl weekend was a week later.

50:20So I kidded them. Does this mean spring season is going to start a week later. They say, no, it's going to start in early February. But early February, demand starts to go up because people start to look at houses heavily because they want to be in a school district in September and they want to get into the house delivered in time for the school year for their child. In some cases, in times for the summer because they have a backyard with a little bit of waiting pool in it for their children. So you get the spring salary season and then they accelerate the number of expects during the season.

50:51The home builders are pretty good at this. I was going to say that timeframe, that accelerating in February for a September, the family has moved into the house. I mean, that's an incredibly short period of time, which I would have expected it to be much longer cycle in terms of the build out. But is this, to your point, the manufacturing process, which has just gotten that much better? Yeah. Horton now, and I say now that supply constraints no longer exist, can build a house in very close to four months, a little bit more than four months from the time they lay the foundation to the house is complete.

51:26Now, they got to have an inspection and there's usually a punch list and then they've got to close the house. So typically, I would say from the time they break ground on the foundation until the time is actually sold and they get the money might be six months. So February to September, it works out that way. Now, the advantage is they do have some houses that probably have the wool board in, and maybe they're starting to put in the flooring or the carpeting. And those houses, you might be able to get delivery in in a month or two. Impressive. Tying the bow on cash flow dynamics and specifically capital allocation, you mentioned the repurchasing of shares, which could potentially go up in terms of using today's price and what percentage they're buying back.

52:10Is there anything else unique going on with capital allocation dynamics that you think's important to mention here? No, you can pretty well figure out what the free cash flow is of a builder. Horton today needs about 50 cents of inventory for every dollar of revenues. That's about half of what they needed 10 years ago. So if they're growing at a certain rate, you can take the growth in revenues, you can divide that in half and you can see how much more inventories they need. You can subtract that from net income, and you can see what the free cash flow is. So the free cash flow this year should be something over $3 billion.

52:46They say it's going to be over $3 billion. And to show the conservatism here, they say they're going to repurchase $1 .5 billion worth of stock. Now, I think they're going to repurchase more than that. And it's a September year, and in December quarter, they did repurchase more than that going rate. And they pay about $500 billion a year in dividends. So if they just repurchased a billion and a half dollars worth of stock and paid $500 million of dividends, their net cash would increase by more than a billion dollars this year. I don't think it's going to happen. I think they're going to buy back more stock or they're going to find attractive land and then start growing faster than the 8 % or 9%, which I talked about earlier.

53:25That's a possibility. And is there any methodology that they use for buying back stock when it comes to thinking about valuation? Is it a fairly steady percentage of the market cap that they're buying back or anything that they use to toggle that decision -making between buybacks, dividends, or investing back into the business via land? In terms of the timing of share repurchases, early in the year, the building is more capital -intensive because they're starting more homes. The spring selling season begins, and it's putting more homes in the ground in February, March, April than they would at other times of the year.

54:01Those homes tend to be sold late in the year, and they tend to get heavy cash flows late in the year. So they tend to buy back more stock late in the year than early in the year as an industry. Toll bought back an amazing amount of stock in the fourth quarter of the last year. They said, we simply had the cash. We had a great year, and we bought back the stock. Toll and Pulte are buying back 5%, 6%, 7 % of their stock each year. Horton and Lenore are buying back 2 % or 3%. And that is the gap that's crossed my mind. What are toll of us at? What is Horton and what is Lenar going to do with their cash?

54:38And I can't get that answer. The answer may be that they may grow faster than the 8 % or 9%, that they see opportunities out there to acquire many, many small builders, in effect, buy their land. Wind down the conversation with a few miscellaneous questions I had. When it comes to the buyer base, we always think about home building as families looking to purchase homes, oftentimes first time. It seems like there's a shift or the headline suggests that there's been this shift towards more institutional buyers where you're seeing the large groups, the large infrastructure funds, real estate funds, buying single families that are then converting them into rentals.

55:22but maybe more of a shift towards institutional ownership. Is that something that you, one, see, and two, think has a material impact on the business? It is happening, but to a limited extent. And I'll put it in perspective. Horton probably is the largest builder of homes for rent. That is not included in the 89 ,000 and 90 ,000 houses they're going to sell this year. It's about 10 % of their business. So they may sell about 8 ,000 homes that they built to rent. And those are bought by institutions heavily hedge funds. Horton is larger than that compared to the other builders. I think it's a very small percentage of the market.

56:02It may be 30 ,000 homes a year are built to rent and therefore will be owned by institutions. Out of the 660 ,000 single -family homes that were sold last year. So it's 5%. It serves a purpose. because with affordability issue, particularly with mortgage rates going up, if you live in an apartment and you just had a child and you want a home in a good school district and you want a backyard with a barbecue and you want a little pool for your kids and you want a house, but you can't afford the down deposit, you may rent the house as opposed to rent an apartment and get the suburban living style and get a backyard and get in a good school district.

56:43So that is happening, but I think it's going to stay fairly limited. Very interesting. And you segued a bit into my other miscellaneous question, which we've touched on a few different times, but do you have a rule of thumb when thinking about how interest rates, specifically mortgage rates, impact a business like D .R. Horton? Yeah, they do because there are two issues in affordability. One is the price of the house and the other is mortgage rates. So if mortgage rates climbed higher from here, I think there'd be sticker shock. People that are looking to buy a house and pay today what the mortgage rate is, 6 .75, and they might have to pay nine, they would say, oh, let's defer it, mortgage rates come down.

57:31But eventually, they have to live somewhere. So again, in the 1980s and 1990s, mortgage rates averaged 10 % and housing demand was fine. And then I want to look at another geography in terms of affordability, California. So where the average house in Alabama might have sold for $200 ,000 or $300 ,000, historically, the same house in California might have sold for a million dollars. Now, people didn't have three or four or five times the income. So affordability has continued to be an issue in California, yet people live in single -family homes. They adjust their lifestyle otherwise. I think if mortgage rates rise from here, several things will happen.

58:11One, people buy less expensive houses, maybe smaller houses, maybe houses with less content. Number two, home builders have always given incentives to buy a house. So if you come in, Willis' house is priced at $375 ,000. But if you buy it today, Matt, I'm going to throw in this beautiful nylon on carpets, which is $15 ,000 extra. And I'm going to put some marble in the bathroom for you. And that's $10 ,000. So buy the house today and you get these incentives. When interest rates rose sharply, the incentives changed to with interest rate buy downs. So when interest rates were 8%, they would come to you and say, Matt, I know 8 % is a lot for you and your monthly payments are going to be high, but we are going to give you a 6 3 .25 % mortgage.

58:59Now doing that cost 1 % mortgage reduction cost 4 % on gross margins. So it reduced the gross margins of the company, but the companies didn't give the other incentives that they normally gave. So it was a trade -off. So I think you could see creative ways. I think other things happen when mortgage rates go up. Many people buying houses today are buying them in their 30s. They used to buy them when they're in their 20s. They have more money because they've been working longer. You now have large wealth in older generations, and in many cases, the older generation, the parents are helping with the deposit.

59:37So the deposit you put down is larger, so your mortgage payments are going to be smaller. So there are mitigations, I think, to high interest rates if interest rates went up sharply from here. Of course, interest rates today are probably pretty normal at six and three quarters percent. Unless inflation really spiked, I would not think that that's a major risk for the home builders. We close out these conversations trying to focus in on lessons. So when you think about D .R. Horton, maybe even the home builders more broadly, and having spent time looking at this industry, again, going back in time, multiple decades, what are the lessons that stand out from this industry that you think you could potentially apply elsewhere when looking at other industries?

1:00:22I think the lesson we learned is you have to really step back and analyze a business as to the nature of the business. What do they really do? Not what other people are saying they really do. Not what the analysts are saying. The analysts tend to be very short -term oriented, and I think they have completely underestimated the change of the business. They consider it still a real estate business. It's not. It's a manufacturing business. The ownership of land is incidental, and I don't think they've made that change. So I think in our case, It was understanding that the companies had the wrong model, that they had the model of owning a lot of land and keeping that land on the balance sheet.

1:01:07And once we realized that, it was the process of speaking to the companies and finding out why they owned all the land, what their rationale was, and trying to get them to change their minds. I don't know if our little firm was largely responsible for them changing their minds, but I think we played a role. We do speak to the managements. I know the CEOs of the companies. I've known Stuart Miller from Lenar since the year 2000. That was a year, as I remember, when they bought U .S. Home, which was a stock we owned, and I kidded them that they stole the stock from us. I wasn't happy. They bought the company at such a cheap price that I was unhappy.

1:01:43I would just have preferred to keep the U .S. Home stock. The lesson is, I think you have to separate yourself from the noise in the street and really it back and say, what is the nature of the business? What are the fundamentals? How do they make their money? What's the management like? Management's so important. What is the cash flow like? What's in it for the shareholder? Where is the stock priced and where should it be priced based on the fundamentals of the company? Excellent. I think there's a really interesting thing there about challenging the conventional wisdom of how a business operates and whether it still needs to operate that way, which you revealed throughout the conversation.

1:02:23So this has been excellent, truly taking us through time, which has been a lot of fun. And thank you for sharing the knowledge. It's been an absolute pleasure. And I'll end it with one comment to follow up on what you just mentioned. To make money in the stock market, you have to have a differing opinion. If you're swimming with everybody else, it's very hard to make money because stocks tend to discount the fundamentals. So you have to have a differing view. And that's what we have in the home builders. simply that they are worth 16 or 20 times earnings, not the 10 times earnings they're holding selling at today.

1:02:54And when the market realizes that, I think we're going to be very happy and I think the shareholders will be very happy. I love that. What a perfect way to end. Well, thank you very much, Ed. My pleasure. To find more episodes of Breakdowns ranging from Costco to Visa to Moderna or to sign up for our weekly summary, check out joincolossus .com. That's J -O -I -N -C -O -L -O -S -S -U -S .com. Thank you.