I have, several times, stated my puzzlement over LGIH’s sustaining 30% and 40% revenue growth with only 9% net margin. The other morning I awoke to an epiphany: number of inventory turns. Obvious. Right?
After a short while of re-reading the 2016 annual I calculated some approximations:
lot value: 15%
improvements value 85%
Raw land purchases are turned into houses over 3 to 5 years, average 4. Very crudely that is 1/4 inventory turn.
Houses are built in 45-75 days, average 60. Based on annual sales and year-end completed houses, they have 2.5 months inventory on hand. Closings are 30-60 days, average 1.5. 2.5 months in the sales process, 1.5 months in closing, and 2 months in construction is 6 months. But only half of the inventory value of the structure is there on average, so take away one month. Net, 5 months. That gives you 12/5, or 2.4 inventory turns on 85% of the cost. Overall they have 9% net margin (closer to 10% now). Without the rest of the intervening math, that is 0.34% on the land portion and 19.4% annual on the improvements on an annual basis. Then leverage that 1.5 with borrowing and that’s 29.6%. But that needs finance only 91% of the sales value (if SG&A are constant %), so the growth rate can be 32-33%. More or less. I think. But the epiphany was pre-coffee so all bets are off.
Anyway, I have a theoretical framework for an explanation.
KC, awaiting 3Q and who accepted a buy bid on 100 shares in the post market this morning. $62.30