LGI Homes vs. competitors

Over a year ago, a TMF Value Hounds post gave a heads up about NVR Inc (NRV) as an undiscovered gem in the housing sector that triggered my due diligence on not only NVR, but also D. R. Horton (DHI), Standard Pacific Corp (SPF), Lennar Corp (LEN), PulteGroup (PHM) and KB Home (KBH). I ended up investing in DHI in August 2014 which subsequently realized a substantial stock price gain of 45%.

Since I had residual research data tables about these homebuilders in my computer files, I thought it would be beneficial to compare the newly announced addition here - LGI Homes Inc (LGIH), a growth-oriented small cap momentum stock - with its major competitors, i.e., DHI, LEN, PHM, CAA and KBH that interestingly all have current buy recommendations from S&P Capital IQ. Also both LGIH and DHI are Zacks Rank #1 strong buys. CAA is the CalAtlantic Group, the 4th largest homebuilder, upon a recently completed merger on 10/2/2015 of Standard Pacific Corp and the Ryland Group.

BUSINESS DESCRIPTIONS

For this effort, my post will compare small cap LGIH with the 4 largest U.S. homebuilders - DHI, LEN, PHM and CAA - plus KBH in terms of product mix, average sales price, home closings, geographic diversification and financial fundamentals. Since I’m a DHI investor, I provide more focus and attention on direct comparisons between DHI and LGIH.
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Product Mix

Since its founding in 2003, LGIH has concentrated on entry-level home buyers primarily in Texas. To a much lesser extent, it also provides homes for move-up and active adult buyers. As shown in the following table, the LGIH product mix is more than 90% entry-level and less than 10% move-up. In 2014, LGIH launched its new Terrata Homes brand at its Potranco Ranch community in San Antonio, Texas that features at a higher price point with expected sales prices at $350,000 and up for homes larger than 2,500 square feet. LGIH closed its first Terrata Home sale during January 2015. A second Terrata Homes community is located in Lancaster, South Carolina, 30 miles south of Charlotte, North Carolina, and is expected to open for sales in mid-2015.

Founded in 1978, D. R. Horton (DHI) has built and sold over 500,000 homes, and for each of the recent past 13 years has been the #1 home builder in the U.S. Three divisions represent its product mix, i.e., 13% entry-level: Express Homes; 85% move-up: D.R. Horton; and 2% luxury: Emerald Homes. As a major LGIH competitor, in Spring 2014, DHI launched Express Homes focused on entry-level buyers in 44 markets in 14 States. For 3rd Q 2015, Express Homes represented 19% of homes sold, 16% of homes closed and 10% of home sales revenue at an average closing price of $188K.


PRODUCT MIX	LGIH	DHI	LEN	PHM	KBH	CAA	CAA
OF CLOSINGS					     Ryland	 SP
Entry-level     >90%	13%	NA	25%	NA	28%	21%
Move-up		<10%    85%	NA	44%	NA	69%	76%
Luxury		         2%			NA	 3%	
Active Adult			NA	31%	NA		 3%

Average Sales Price

As shown in the following table, annual Average Sales Price is realizing a significant increasing trend for all of the homebuilders, perhaps due to changes in product mix, construction costs, land costs and other factors. Sticker price increases and shock are significant here when the stagnant growth of wages is taken into account and gives potential homebuyers reason to pause making any purchase.


AVERAGE						
SALES PRICE	LGIH	DHI	LEN	PHM	KBH	CAA
(thousand $)						
FY 2014	        163	272	326	329	328	478
FY 2013	        151	249	290	305	292	413
FY 2012	        138	223	257	276	247	362
FY 2011	        131	212	248	259	225	349
FY 2010		        206	346	259	215	343

Note: CAA figures are only Standard Pacific average sales prices.

Home Closings

The following table illustrates in part the recovery of the housing market. From FY 2011 to FY 2014, the following homebuilders realized substantial gains in home closings: LGIH 526% from 376 to 2,356 closings; CAA 113% from 5,941 to 12,633; LEN 94% from 10,845 to 21,003; and DHI 72% from 16,695 to 28,670.

Regarding LGIH, of the total 2,356 home closings in FY 2014, 67% or 1,575 closings occurred in Texas.


HOME						
CLOSINGS	  LGIH	   DHI	   LEN	   PHM	  KBH	   CAA
FY 2014	         2,356	28,670	21,003	17,196	7,215	12,633
FY 2013	         1,617	24,155	18,290	17,766	7,145	11,629
FY 2012	           536	18,890	13,802	16,505	6,282	 8,100
FY 2011	           376	16,695	10,845	15,275	5,812	 5,941
FY 2010		        20,875	10,955	17,095	7,346	 6,585

Note: CAA totals combine Standard Pacific and Ryland closings.

Geographic diversification

Clearly, DHI has the largest footprint in 79 markets covering 27 States compared to LGIH in only 13 markets covering 8 States. LGIH faces very stiff competition in all its current markets.


LOCATIONS      LGIH    DHI     LEN     PHM     KBH     CAA
Alabama		        x				
Arizona	        x	x	x	x	x	x
California		x	x	x	x	x
Colorado	x	x	x		x	x
Conneticut				x		
Delaware		x				x
Florida	        x	x	x	x	x	x
Georgia	        x	x	x	x		x
Hawaii		        x				
Illinois		x		x		x
Indiana  		x	x	x		x
Kentucky				x		
Louisiana		x				
Maryland		x	x	x	x	x
Massachusetts				x		
Michigan				x		
Minnesota		x	x	x		x
Mississippi		x				
Missouri				x		
Nevada		        x	x	x	x	x
New Jersey		x	x	x		x
New Mexico	x	x		x	x	
New York				x		
North Carolina	x	x	x	x	x	x
Ohio				        x		
Oklahoma		x				
Oregon		        x	x			
Pennsylvania		x		x		x
Rhode Island				x		
South Carolina	x	x	x	x		x
Tennessee		x	x	x		
Texas	        x	x	x	x	x	x
Utah		        x				
Virginia		x	x	x	x	x
Washington		x	x	x		
						
TOTAL STATES	 8	27	17	26	10	17
Markets	        13	79	40	49	40	41

CORPORATE FINANCIALS

All of the homebuilders in the following table have very reasonable P/E ratios with attractive lower forward P/Es. Current stock prices have not faltered significantly from 52-week highs and have held up well during ongoing wide swings in the stock market.


	         LGIH	  DHI	  LEN	  PHM	  KBH	  CAA
						
Market Cap    643.64M  11.24B  10.66B	7.10B	1.35B	4.95B
Employees	  390	5,621	6,825	4,149	1,590	
						
52-wk high	32.86	33.06	56.04	23.36	18.10	46.75
10/9/15 Price	32.33	30.65	51.33	20.12	14.70	41.02
52-wk low	12.21	19.29	37.50	16.56	11.76	32.60
						
P/E (ttm)	19.3	16.6	16.5	14.4	 1.7	15.9
FWD P/E	         6.1	13.0	13.1	13.0	11.5	10.7
P/B (mrq)	 3.1	 2.0	 2.0	 1.6	 0.8	 1.3
P/S (ttm)	 1.5	 1.1	 1.4	 1.2	 0.6	 1.0
EV/EBITDA (ttm)	13.0	12.5	14.0	10.6	23.3	12.6

Revenue

As shown in the following table, LGIH has realized phenomenal YoY growth in annual revenue, i.e., 51%, 114% and 135% for fiscal years 2012, 2013 and 2014, respectively. [Note: most of the annual revenues and percentages in Saul’s recent OP on LGIH do not match with annual revenue and YoY percentages stated here, which were derived from annual revenue reported in 10K filings].

Since 2011, the big homebuilders have produced good to excellent YoY revenue growth, especially DHI with revenue gains of 20%, 44% and 28% for FY 2012, 2013 and 2014, respectively. It should be mentioned that DHI made the following acquisitions that increased annual revenue: in August 2012, Breland Homes (Huntsville and Mobile, Alabama and Mississippi gulf coast) for $105.9 M in cash; in October 2013, Regent Homes (Charlotte, Greensboro and Winston-Salem, North Carolina) for $34.5 M in cash; in May 2014, Crown Communities (Georgia, South Carolina and eastern Alabama for $209.6 million in cash; and in May 2014, Pacific Ridge Homes (Seattle WA) for $70.9 M.


REVENUE $M	LGIH	  DHI	  LEN	  PHM	  KBH
					
TTM	         481   10,124	9,112	5,831	2,842
					
FY 2014	         383	8,025	7,780	5,822	2,401
YoY Change	135%	  28%	  31%	   3%	  14%
					
FY 2013	         163	6,259	5,935	5,680	2,097
YoY Change	114%	  44%	  45%	  18%	  34%
					
FY 2012	          76	4,354	4,105	4,820	1,560
YoY Change	 51%	  20%	  33%	  17%	  19%
					
FY 2011	          50	3,637	3,095	4,137	1,316
YoY Change		 -17%	   1%	  -9%	 -17%
					
FY 2010		        4,400	3,074	4,569	1,590

Net Income & Earnings

LGIH also has realized strong YoY growth in annual net income, i.e., 190%, 130% and 26% for fiscal years 2012, 2013 and 2014, respectively, and as expected are trending downward.


INCOME $M	LGIH	  DHI	  LEN	  PHM	  KBH
TTM	          36	  678	  759	  512	  891
					
FY 2014	          28	  534	  639	  474	  918
YoY Change	 26%	  15%	  33%	 -82%  2,198%
					
FY 2013	          22	  463	  480	2,620	   40
YoY Change	130%	 -52%	 -29%  1,171%	
					
FY 2012	          10	  956	  679	  206	  -59
YoY Change	190%   1,232%	 637%		
					
FY 2011	           3	  72	   92	 -210	 -179
YoY Change		-71%	  -3%		
					          -69
FY 2010		         245	   95  -1,097	

For annual earnings reported in 10K filings, LGIH realized a substantial 291% gain in dilluted EPS from $0.34 in 2013 to $1.33 in 2014. [Note: again the figures in Saul’s OP do not match with figures here.]

The earnings of the big companies are now showing steady strong growth.


EPS diluted $	LGIH	 DHI	  LEN	  PHM	  KBH
TTM	        1.66	1.84	 3.32	 1.40	 8.81
					
FY 2014	        1.33	1.50	 2.80	 1.26	 9.25
YoY Change	291%	 13%	  30%	 -81%  1,911%
					
FY 2013	        0.34	1.33	 2.15	 6.72	 0.46
YoY Change		-52%	 -31%  1,144%	
					
FY 2012		        2.77	 3.11	 0.54	-0.76
YoY Change	      1,104%	 548%		
					
FY 2011		        0.23	 0.48	-0.55	-2.32
YoY Change		-70%	  -6%		
					
FY 2010		        0.77	 0.51	-2.90	-0.90

Margins

As shown in the table below, gross margins of homebuilders are flat or trending downward. Material costs (aka sticks and bricks) have been increasing more or less in line with average selling prices on a per-square-foot basis. Lowered energy prices have been helpful, and lower oil prices mean lower prices for certain building products, e.g., asphalt shingles. Homebuilders have observed wage inflation in skilled trades and have experienced labor shortage problems for a few years.


MARGINS	 LGIH	  DHI	  LEN	  PHM	  KBH
GROSS:					
TTM	26.8%	21.2%	 8.8%	23.2%	15.2%
2014	26.8%	21.9%	14.1%	23.8%	17.2%
2013	25.5%	22.5%	14.0%	20.6%	17.0%
2012	28.5%	19.8%	10.8%	15.7%	15.4%
2011	27.3%	16.9%	 6.4%	12.0%	13.9%
2010		17.6%	 7.1%	 8.6%	17.7%
OPERATING					
TTM	11.3%	 9.9%	12.0%	13.3%	 3.7%
2014	11.1%	 9.9%	11.9%	12.1%	 5.2%
2013	10.1%	10.2%	11.6%	10.4%	 4.8%
2012	12.9%	 6.0%	 7.7%	 4.7%	-0.7%
2011	 8.8%	 0.3%	 3.4%	-0.6%	-7.3%
2010		 2.3%	 4.1%  -11.0%	-0.7%
PROFIT					
TTM	 7.6%	 6.7%	 8.4%	 8.9%	31.4%
2014	 7.4%	 6.7%	 8.2%	 8.2%	38.3%
2013	13.7%	 7.4%	 8.1%	46.1%	 1.9%
2012	12.7%	22.0%	16.5%	 4.3%	-3.8%
2011	 6.6%	 2.0%	 3.0%	-5.1%  -13.6%
2010		 5.6%	 3.1%  -24.0%	-4.4%

ROIC, EVA, Cash Flow & Debt

As expected, ROIC for LGIH is trending downward to annual levels of the other homebuilders. Currently, EVA (the ROIC-WAAC spread) is positive for most of the companies; DHI has an insignificant negative EVA.


10/9/15	LGIH	 DHI	 LEN	 PHM	  KBH
ROIC	  NA    7.9%	8.9%	9.6%	27.4%
WACC	  NA    8.7%	6.7%	8.5%	 9.7%
EVA	  NA   -0.8%	2.2%	1.1%	17.6%
					
ROIC					
2014   10.8%	7.0%	6.7%	8.9%	40.1%
2013   17.5%	7.9%	6.6%   66.7%	 5.7%
2012   58.6%   25.4%   14.2%	6.9%	-0.5%
2011		2.2%	2.1%   -0.4%	-6.1%
2010		7.3%	3.4%   -9.2%	-0.1%

Regarding capital resources and liquidity for homebuilder companies, please read the most recent quarterly and annual SEC filings for full explanations. The big homebuilders like DHI, LEN, PHM and CAA have a major advantage over small builders like LGIH due to their ability to access the capital markets and raise funds very inexpensively. The smaller builders find themselves nearly shut out of the capital markets, giving the big builders a tremendous advantage. Also, large institutional investors have been re-investing in the large homebuilders, while small builders cannot take advantage of opportunities due to tight credit conditions.

For example, here’s DHI Capital Resources and Liquidity:
We have historically funded our homebuilding and financial services operations with cash flows from operating activities, borrowings under bank credit facilities and the issuance of new debt securities. Our current levels of cash, borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to homebuilding market conditions. During the last two years, we have increased our investments in homes, finished lots, land and land development to expand our operations and grow our profitability. We intend to maintain adequate liquidity and balance sheet strength, and we regularly evaluate opportunities to access the capital markets.

DHI’s gross homebuilding debt to total capital was 39.4% in 2014, improving from 44.6%. Net homebuilding debt to total capital was 34.5%, improving from 36.3%.

Regarding liquidity, all of the homebuilders also have excellent current ratios.


	        LGIH	 DHI	 LEN	 PHM	 KBH
FCF million $					
TTM	        -109	   7		   5	  
2014	        -174	-762	-803	 260	-636
2013	         -55  -1,287	-817	 852	-446
2012	          -5	-327	-427	 746	  33
2011	           9	  -1	-269	  -4	-348
2010		         690	 269	 576	-134

					
Cash (mrq)    49.75M  766.7M 817.06M 466.11M 352.95M
Total Debt   239.93M   3.82B   6.79B   1.77B   2.63B
Debt/Equity	117%	 68%	124%	 38%	160%
Current ratio	 8.4	 7.5	 9.4	 2.6	 5.8
					
Dividend	   0	0.25	0.16	0.32	 0.1
Div Yield		0.8%	0.3%	1.6%	0.7%
Payout ratio	       13.6%	       20.8%	

SOME HOUSING MARKET CONCERNS AND TRENDS

(a) A must read and follow for homebuilder investors is the S&P/Case-Shiller Home Price Indices. According to the latest 9/29/2015 release, (a) prices of existing homes and housing overall are seeing strong growth and contributing to recent solid growth for the economy, and (b) July 2015 home price gains were concentrated in the west.
https://www.spice-indices.com/idpfiles/spice-assets/resource…

Analysis
“Prices of existing homes and housing overall are seeing strong growth and contributing to recent solid growth for the economy,” says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The S&P/Case Shiller National Home Price Index has risen at a 4% or higher annual rate since September 2012, well ahead of inflation. Most of the strength is focused on states west of the Mississippi. The three cities with the largest cumulative price increases since January 2000 are all in California: Los Angeles (138%), San Francisco (116%) and San Diego (115%). The two smallest gains since January 2000 are Detroit (3%) and Cleveland (10%). The Sunbelt cities – Miami, Tampa, Phoenix and Las Vegas – which were the poster children of the housing boom have yet to make new all-time highs.

(b) An ongoing major concern for the housing industry is any action (do nothing or something) by the FED regarding interest rates.

(c) During the currently ongoing recovery of the housing market, home prices have been increasing, but growth in wages have been stagnant. Historically, home price appreciation has correlated tightly with income growth, and it wasn’t until the year 2000 that the ratio of median home price to median income broke out of its historical 3.2 x to 3.6 x range.

(c) Repeated again, the big homebuilders like DHI, LEN, PHM and CAA have a major advantage over small builders like LGIH because of their ability to access the capital markets and raise funds very inexpensively. The smaller builders find themselves nearly shut out of the capital markets, giving the big builders a tremendous advantage. Also, large institutional investors are re-investing in the large homebuilders, while small builders find it difficult take advantage of opportunities due to tight credit conditions.

(d) The current climate with rock-bottom borrowing rates and the inherent advantage of size is ripe for mergers and acquisitions. Since FY 2012, DHI has made 4 aforementioned acquisitions, i.e., Breland Homes, Regent Homes, Crown Communities and Pacific Ridge Homes. Just recently on 10/2/2015, Standard Pacific Corp and the Ryland Group recently completed their merger that created the 4th largest homebuilder in the U.S. - the CalAtlantic Group (CAA).

CONCLUSION

Homebuilding companies are cyclical businesses that demand vigilance by investors. After the devastating financial credit crisis and real estate bust, the housing industry has slowly recovered and is showing signs of strong growth.

In addition to the aforementioned homebuilders, there are other worthy companies - NVR Inc (NRV) and Toll Brothers (TOL) - that I looked at a year or so ago, but did not include here due to space limitations.

For now, I am very satisfied with my investment in DHI, the #1 homebuilder in the U.S. As always conduct your own due diligence.

Regards,
Ray

31 Likes

Ray,

Excellent write up.

Sticker price increases and shock are significant here when the stagnant growth of wages is taken into account and gives potential homebuyers reason to pause making any purchase.

I would say that there are additional important points that should be considered with respect to the above statement:

  1. 90% of LGIH’s sold homes are starter homes (I’m assuming first time home buyers).

  2. Credit conditions for qualifying for mortgages have been loosening.

  3. While wages have not yet seen growth, unemployment has been steadily dropping.

  4. Unemployment has been disproportionally high among younger people with fewer (or no) years of previous work experience.

  5. Many of these younger people have been living in roommate situations or with their parents, unable to afford their own household or unable to qualify for a mortgage to buy a starter home and take advantage of historically low interest rates.

My conclusions: the above points, taken together, should provide a tailwind to LGIH home sales and more than offset any “sticker shock” and stagnant wage growth (in fact wage growth is extremely high for people who were previously under- or unemployed!).

Chris

4 Likes

Thanks Ray, That was a very nice write-up, and very useful. Perhaps the reason that some of your figures didn’t coincide exactly with mine was this:

Prior to the completion of the Company’s initial public offering (the “IPO”), the Company’s predecessor owned a 15% equity interest in and managed the day-to-day operations of four joint venture entities (the “LGI/GTIS Joint Ventures”). Concurrent with the IPO, the Company acquired all of the equity interests in the LGI/GTIS Joint Ventures that it did not own immediately prior to the IPO (the “GTIS Acquisitions”). The historical financial statements, for the three and nine months ended September 30, 2013, present the predecessor’s interests in the LGI/GTIS Joint Ventures using the equity method and the predecessor’s share of the LGI/GTIS Joint Ventures’ net earnings are included in income from unconsolidated joint ventures. Effective November 13, 2013, the Company owns all of the equity interests in the LGI/GTIS Joint Ventures and accounts for them on a consolidated basis after such date.

If you were looking at just the yearly SEC submissions for your revenue figures you might not have picked this up. I got my revenue figures from each quarter’s press release in which they compared to the year before, and undoubtedly some of the year before results were corrected and restated in light of the above. In any case the differences wouldn’t have changed either of our conclusions.

By the way, you say LGIH is facing intense competition in each of its markets. Since they have the HIGHEST gross margins, I’d say that belies them facing intense competition.

As an aside, you have KBH with a Net Margin which is double its Gross Margin and ten times its Operating Margin. As that’s impossible, it must be one of those crazy GAAP distortions.

Thanks again,

Saul

For Knowledgebase for this board
please go to Post #9939.

A link to the Knowledgebase is also at the top of the Announcements column
on the right side of every page on this board

4 Likes

As an aside, you have KBH with a Net Margin which is double its Gross Margin and ten times its Operating Margin. As that’s impossible, it must be one of those crazy GAAP distortions.

Saul,

First of all, thanks for your compliment.

KBH figures look odd not only in my post’s table for margins, but also the tables for net income and diluted EPS.

There is a reason in the KB Homes FY 2014 10K filing.

KB Homes recognized an income tax benefit of $823.4 million that caused the following chain reaction: (a) spiked up net income to $918.3 million; (b) spiked up diluted EPS to $9.25; (c) spiked up net/ profit margin to 38.3%; (d) tripled stockholders’ equity; and (e) significantly reduced the debt leverage ratio.

Here’s the full explanation in FY 2014 10K filing:
http://files.shareholder.com/downloads/KBH/844751076x0x80453…

Deferred Tax Asset Valuation Allowance . We reversed a substantial portion of our deferred tax asset valuation allowance at November 30, 2014, largely due to our consistent profitability. Among other things, the reversal nearly tripled our stockholders’ equity, significantly reduced our debt leverage ratio, and, going forward, enables us to potentially shelter, on a cash basis, more than $2 billion of future earnings from income taxes. The reversal also helped drive our net income to $918.3 million for the year.

Under Statement of Operations:

Income Taxes. We recognized an income tax benefit of $823.4 million in 2014 and $1.6 million in 2013. The income tax benefit increased in 2014 primarily due to the reversal of $825.2 million of our deferred tax asset valuation allowance in the fourth quarter of 2014.

Net Income . We generated net income of $918.3 million , or $9.25 per diluted share, in 2014, compared to $40.0 million , or $.46 per diluted share, in 2013. Our net income for 2014 included the above-mentioned income tax benefit and a $3.2 million gain on the sale of our interest in an unconsolidated joint venture in Maryland, which were partly offset by the $39.4 million of inventory impairment and land option contract abandonment charges noted above. Our net income for 2013 included the above-described net warranty charge, a loss on the early extinguishment of debt, inventory impairment and land option contract abandonment charges, and the reversal of a previously established accrual. Our 2013 net income also included the above-mentioned income tax benefit.

Regards,
Ray

2 Likes

As an aside, you have KBH with a Net Margin which is double its Gross Margin and ten times its Operating Margin. As that’s impossible, it must be one of those crazy GAAP distortions.

Saul…KB Homes recognized an income tax benefit of $823.4 million

Hi Ray, That’s exactly what I expected.
Thanks,
Saul