LGIH came out with Nov closings…321, or a 29% increase from last Nov…solid. They said on last month’s CC that:
…our grand openings are scheduled in December, so in Portland and Raleigh. So likely those closings are going to fall into January or February…
Last year the numbers were a little bit more heavily weighted to December than November.
And then 433 in December which was the best month we ever had and a very strong month, it’s going to be tougher comp.
So given all this, what’s a reasonable number for December closings? Sounds like 433 will be hard to even match…but they would actually need to exceed that to reach the midpoint of their annual guidance.
Also, analysts must be factoring in a large number for Dec closings and also for ASP (higher than LGIH’s very conservative-seeming range)…I can’t seem to get the math to work with expectations I think reasonable.
I’ve been thinking on your post for several days now (but I’ve been distracted by yoga and other adventures in Colombia). You have an interesting point worth considering, but I have kept going back to one fact of LGIH over the past year:
LGIH has continued to perform reasonably well in spite of every doubt by analysts and in spite of every larger trend in housing looking grim.
Potential upcoming changes in interest rates are of course an open concern at the moment, but I suspect nobody is correctly accounting for how LGIH’s customer base is different from their competitors.
I have no clue how the numbers will turn out for home sales … I don’t pay much attention to that in my own analysis. The hard comp may lead to a temporary drop in price, but I think that would be only a short term drop. If that does happen, I may buy more of the stock.
given all this, what’s a reasonable number for December closings? Sounds like 433 will be hard to even match…
Bear, Last year they went from 249 in November to 433 to December, so why is 433 impossible this year, coming off 321? At any rate, worrying about one month’s closings not being able to match the all time high a year ago seems VERY short term thinking to me. Here’s what they said last month while discussing the Sept quarter:
Our average sales price increased over 4% sequentially! We believe it will continue to increase for the rest of the year.
We expect our adjusted gross margin will continue to be strong.
We continue to believe basic earnings per share will be $3.20 to $3.70 for the year.
We believe LGI will one day have a presence in the majority of the top 50 markets in the US. As we progress toward achieving this goal, I’m excited to announce that we’ve our first project under contract in Minneapolis. The test marketing results are looking great. We plan to continue to look at acquisitions in this market and we anticipate our first home closing in late 2017 or early 2018. In addition, we are actively looking for opportunities to begin operations in the Las Vegas market in 2017 as well.
We expect to increase our community count by at least 20% during 2017. Our gross margin, overall absorptions, and SG&A as a percent of revenue will generally remain consistent into the next year.
We do NOT believe that competition is going to have an effect on LGI operationally. We won’t be changing our closing forecast or absorption pace based on increased competition because we think it’s a very favorable market out there. So it’s all positive for us.
Now really, Bear, Is there anything in that that makes you worry? Especially as management is always more conservative than what they figure will really happen? Relax and enjoy the ride.
Bear, Last year they went from 249 in November to 433 to December, so why is 433 impossible this year, coming off 321?
As I quoted from the CC, they said: “Last year the numbers were a little bit more heavily weighted to December than November.” This makes me think it will be harder to close as many in Dec this year.
Now really, Bear, Is there anything in that that makes you worry?
You quoted them saying, “We do NOT believe that competition is going to have an effect on LGI operationally.” That worries me a little because I don’t know how it could possibly be true. Strikes me as overly optimistic, like when INFN or SKX thought they could grow at 30% forever. Surely competition has to have SOME effect, right?
Relax and enjoy the ride? It’s a lot more fun for me to try to figure out what’s likely to happen next. Sure, maybe the long term outlook for LGIH is great, but if there’s a decent chance they won’t make their December (and therefore Q4) numbers, I’d much rather buy after that happens, at a discount.
As I quoted from the CC, they said: “Last year the numbers were a little bit more heavily weighted to December than November.” This makes me think it will be harder to close as many in Dec this year.
It sounds to me all he is saying is that December will be a tough comparable. That isn’t saying they will miss or beat the numbers.
If you are worried about a short term decline maybe you could consider selling half and waiting for your pullback. That way if you get your pullback you will have cash to deploy. If not you will still have half a position in the stock and can find another great opportunity to put the extra money. That is actually what I am doing right now. I sold my entire position up at $39 since I thought it may have ran a bit too much and wanted to take some off the table. I bought back half a position between $31 and $35 waiting for a potential opportunity to fill out my position.
If you want to just take a longer view they are projected to make around $4 in earnings in 2017 according to yahoo finance. If you put a very conservative multiple of 10 on that EPS you get a share price of $40 per share. That is just about a 20% gain for the year at todays close of just over $33. Not too bad. Though a 10x multiple is actually pretty low. What if we increase that to say a 13 p/e then all the sudden we got a stock price of $52. Not bad at all. Granted this all assumes nothing unforseen happens to hurt their business and they continue with their plan to increase their sites by 20% next year.
I guess the point I am trying to make is yes we might get a pullback. If you want to hold some cash on the side to take advantage that is perfectly fine. Though today’s price is pretty good and as long as the company keeps performing I wouldn’t be surprised if investors buying today did pretty well.
About 3PM eastern time yesterday I’m out golfing on the west edge of Phoenix and I pull up a screen on the iPhone to see what my stocks have been up to for the day. My buddy says “LGI Homes, you have that? They’re amazing. They whip out a home in 90 days.”
Once a quarter he does some part time work for a survey company checking out increases in lot development and home building in a section of the Phoenix area. He once covered the area west of here in a town called Buckeye, Sundance & Crystal Vista being the development names. http://www.lgihomes.com/landing.cfm?id=phoenix
Aside from that I don't think they will have any problem making their numbers, I believe they were being a bit conservative with their projection of 4,000 to 4,300 sales for the year. They had to cover the possibility of a couple bad weeks of Texas weather.If they match last December they will hit 4,129.
I'll have to cruise over to Buckeye and check out their product.
JT
They actually have several communities in the PHX area. I was out in Maricopa (the town, not the county) for a kids’ soccer game and I saw an LGIHomes sign.
I swung in and decided to talk to they guy. Very friendly and gave me the low down. It was interesting as the “model” was a home with a bunch of tables in it, like a bank lobby, not decorated like a home at all.
He confirmed that this particular community was almost closed and they are opening a new one soon.
These were very inexpensive homes, in the low 100s. I am not familiar with Houston, but the areas of Crystal Vista, Buckeye and Maricopa are among the more affordable areas to live.
The guy said that the CEO was just in to check on things and everyone loves working there. Although he wasn’t sure “how in the world” LGI was able to sell $800k homes with no choice of options, as they are all pre-built.
I generated some numbers based on what I thought it would take for get them to hit this quarter’s earnings projections of $1.00 per share.
Their quarterly margins bounce around a bit, but I’m using $235M as a home sales revenue target.
The average selling price over the last two years has been:
2015: 179866 186197 186248 186855
2016: 192491 197450 205613
So, I penciled in 211600 for the upcoming quarter.
235M / 211600 = 1110 is the number of closings they’ll need for the quarter. This would bring their annual home closings up to 4134, which would be inside their projected range of 4000-4300.
Subtracting out their reported Oct/Nov closings, means they’ll need 1110-321-351 = 438 closings in December. This will be tough to hit but not impossible. Their monthly closing numbers bounce around a lot but their smoothed average clearly continues to rise. 438 is substantially above their long term smoothed average which I have currently as about 380, but they had similarly outsized numbers twice in the last year, last May (432) and December (433). OTOH, those are the only two months in the last 3 years showing the level of outperformance required. LGI has said that December is typically seasonally high, which seems to be supported by the data for the last three years.
At the end of the day, I’ve closed out my LGI position for now. They certainly could hit 438 or even exceed it, but my gut tells me there’s a higher chance of the number being below 438 than above it.
My style is much shorter term than most people on this board, particularly with cyclical stocks like LGIH. For the next year, I continue to be optimistic about LGIH. I’m just hoping I’ll be able to get back in at a better price. (It’s a coincidental benefit that I get to be on the sidelines for the upcoming Fed meeting.)
They certainly could hit 438 or even exceed it, but my gut tells me there’s a higher chance of the number being below 438 than above it.
Hi Pick Trader,
That’s a very nice analysis and it seems very reasonable. But here’s a slightly different way of looking at your conclusion: Perhaps many people who follow the company have made similar analyses, and they have also concluded that there’s a higher chance of the number being below 438 than above it, and that’s why the PE is so incredibly low for a company growing earnings at 47%. They are all waiting for earnings to be announced to get back in cheaper.
And say LGIH only make 96 cents (up 21 cents from the year before), or $1.04 (up 29 cents from the year before)…but the management continues to give VERY confident guidance for the coming year. After all, what counts is the future, and in the last conference call they were VERY enthusiastic (It’s all good" or something like that.) It’s just possible that the price will go way up. After all, just 96 cents gives trailing earnings of $3.35 and a PE of just 11 would give a stock price of $36.85, and earnings of $1.04 gives earnings of $3.43, and a PE of 11 would give a price of $37.73, while an “extravagant” PE of 12 would give $41.16. And all that is without a beat. Just plain vanilla results. If they beat last years closings by just 5% (remember they have a lot more open communities this year than last year) with average closing price up over 13% by your $211,600 estimate…etc, etc.
In sum, with a PE of 10 it seems to me there’s a lot more room to rise than room to fall. But maybe I’m just overly optimistic and believing management too much.
Best,
Saul
They are all waiting for earnings to be announced to get back in cheaper.
Really good point, Saul. Could be almost like a short squeeze if the results are good enough. But I certainly am not expecting that. I agree with soth that it’s more likely they’re under 438 homes in Dec than over. HOWEVER:
And say LGIH only make 96 cents (up 21 cents from the year before), or $1.04 (up 29 cents from the year before)…but the management continues to give VERY confident guidance for the coming year. After all, what counts is the future, and in the last conference call they were VERY enthusiastic (It’s all good" or something like that.) It’s just possible that the price will go way up.
That is another incredibly good point. Maybe a Q4 miss doesn’t even really matter. As long as the 2017 growth and profit plans they’ve laid out are intact, the PE of 10 makes it easy for the stock to appreciate anyway.
I agree with soth that it’s more likely they’re under 438 homes in Dec than over.
I believe that there is a very good chance they will make their numbers. Looking at past quarters, there was no consensus that rates will rise like there is now. I suspect that many potential buyers have been incented into the action column by their thought that rates will be going up.
The “common” investor may think this or perhaps they think that regardless if this is the truth or not the market is going to react a certain way. I believe that with worldwide interest rates at unprecedented low levels and the dollar as high as it is the US is not going to be able to bump rates up quickly at all. I believe rates will have to stay low for years. Europe, Japan, many other countries are stuck in a low rate environment.
Makes sense to consider your own position on interest rates but this is the information I am acting on when I pick equities like LGIH for my portfolio.