LGI Homes (LGIH) mid-quarter review

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LGI Homes (LGIH) mid-quarter review

Home building? What do you know about home building and the housing market?
I don’t know anything about home building or the housing market except what I read. Therefore what I am giving you are just my own inexact impressions, which may definitely include misunderstandings. Okay,

Who is LGI Homes?
This company was founded in 2003 and is headquartered in The Woodlands, a suburb of Houston. The company designs, constructs, and sells homes in Texas, Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina, and South Carolina, and is expanding into other states like Oregon. Their biggest market by far is Texas where they started out, but others are starting to catch up.

There are a lot of home builders. What is its secret sauce?
It’s not really a secret, but what they do is market to renters, first time home buyers, and say “You can have a home of your own for the same monthly payment that you are paying for rent.” That’s a very powerful appeal, as you can imagine.

Another thing that impresses me is that they have managed to be successful in Texas, in the middle of the oil-patch, in an oil blood-bath, so they probably know what they are doing and will know how to manoeuvre a bit better in the next housing downturn than their peers.

How do they do that?
They build a very simple home and build it cost effectively. This allows them to charge a low price for it. They have standard floor plans they build over and over. LGIH sends direct mail to renters in apartment complexes near its new-home communities, explaining how the renters can afford to own an LGI Home for the same amount or less than their monthly rents. Instead of advertising the price of a home, LGI touts the homes’ monthly payments of $700 to $1,000 a month.

A potential buyer is sent to the sales offices of a nearby LGI community, where they investigate whether they qualify for a low down-payment loan, perhaps a 3.5% FHA loan. Or for those with really good credit, LGI even offers “no money down” financing. If they qualify LGI will literally walk a couple out to a finished home they can buy. Many of them never even imagined that they could become homeowners.

That sounds dangerous. What if there is a recession and a lot of these people lose their jobs?
It sounds dangerous to me too.

What is your history with them?
I’ve been a stockholder for just 7 weeks now. Somehow they’ve gotten to be my fifth largest position. That’s probably because some of the other stocks dropped precipitously in value and they didn’t.

How successful have they been?
You wouldn’t believe it! Here are their quarterly sales revenues for the last two years nine months. And remember, this is in Texas, in the oil crisis!
36
60
68
77
76
106
93
108
121
159
174
Revenue was up 68.5% from 2012 to 2013, and up 58.9% from 2013 to 2014. It’s up 65.1% in the first nine months of this year, so the law of big numbers hasn’t caught up with them yet.

And their earnings over the same time. The March quarter (winter) is always slowest. I put those in italics so you could pick them out. (even though they are lower than the other quarters, just notice the sequence: 12 cents in 2013, 22 cents in 2014, 33 cents in 2015. Wow!)
12
24
27
44
22
43
34
39
33
66
76
Earnings were up 149% from 2012 to 2013, but up only 29% from 2013 to 2014. They are up 77% in the first nine months of this year, so they are re-accelerating from the 2014 pace.

Gross margin has been stable at about 28%, or I guess up from 27% two years ago.

The average price was $149 thousand two years ago and is now $186 thousand. And they are selling twice as many houses a quarter.

How has LGIH stock been doing?
I bought about 7 weeks ago and the stock has been in a range from $28 to $33 ever since, just bouncing up and down. I’ve kept adding a little here and there. Their current PE is 14.7 and their rate of growth of 12-month trailing earnings is 50%. After the December quarter results are announced their PE will be about 12.3 at today’s price.

To summarize
This again is more risky than SWKS, but not nearly as risky as SEDG. It’s younger than SWKS, it’s much smaller, and it’s in an industry (home building), which tends towards booms and busts. In addition, a rising interest environment will make it harder for mortgage payment to compete with apartment rental prices. On the other hand, this company has found a niche, and developed a know-how, which has enabled it to grow both sales and earnings, in an oil-depressed State, at an enormous rate. I like it.

I hope you found this one interesting, entertaining and useful too.

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
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In addition, a rising interest environment will make it harder for mortgage payment to compete with apartment rental prices.

I would think that interest rates are perhaps the greatest systemic risk for the industry. And although I personally am not expecting a significant rise in rates for the next couple of years, it’s not the sort of thing that I would want to downplay. Does anybody have any idea just how important this might be for LGIH? I would think that because of its target customer (which is VERY price-sensitive), this might be far more important for them than others in the industry.

as always, i am full of carp

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I would think that because of its target customer (which is VERY price-sensitive), this might be far more important for them than others in the industry.

I think you got it with the above statement. They advertise to potential customers many times by sending them an advertiser in the mail. These advertisers show them the month to month price they would pay on their mortgage versus what they are potentially paying for rent at an apartment. This way of advertising I think could make them relatively sensitive to interest rates since the monthly cost is going to rise as interest rates rise. If interest rates rise enough it may make them once again less appealing compared to rent in the area. When that time comes I don’t think it will do significant harm. They will just have to find a new way to advertise.

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Saul,
Do you see a moat of any sort with LGIH? I don’t see anything inhibiting another builder from copying their plan. Also, interest rate will rise, probably sooner than later. Will they be able to continue claiming that you can buy as cheaply as renting?

Also, the claim is somewhat disingenuous to begin with. The “fully burdened” cost of home ownership exceeds the mortgage payments by a considerable amount. Let’s assume utilities are the same for a rental as for a home (probably not true), but a home had maintenance and repairs that are not incurred by the resident of a rental. Either they’re marginally dishonest in making the claim, or taking advantage of first time buyer’s lack of knowledge.

Maybe they have pretty good numbers, but I have basic misgivings about the business.

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“Fully burdened” cost is more with home ownership. However, you get an asset which is appreciating in value vs money you are throwing away with rent. You receive a tax free gain up to $500,000.00 which should cover any increase in the homes LGIH is selling. You also get interest and taxes as a deduction on your tax return every year. There are many benefits for the incremental cost of home ownership.

Htownrich

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If interest rates rise enough it may make them once again less appealing compared to rent in the area. When that time comes I don’t think it will do significant harm. They will just have to find a new way to advertise.

Or build a smaller (cheaper) house

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I would think that interest rates are perhaps the greatest systemic risk for the industry. And although I personally am not expecting a significant rise in rates for the next couple of years, it’s not the sort of thing that I would want to downplay. Does anybody have any idea just how important this might be for LGIH? I would think that because of its target customer (which is VERY price-sensitive), this might be far more important for them than others in the industry.

I agree that rising rates are likely one of the biggest risks, but like you I don’t see them rising much for a couple years. A 25 basis point rise in rates will barely move the needle.

A $150K home at 3.75 is 694.67/month and at 4.00% it is 716.12/month Or about a 3% increase before tax deductions. Know that apartments are hot right now and rates have been increasing pretty fast, like 5% a year. That may be overweighted in urban area where LGIH does not build. Also note that the Millennials are now a larger generation than that baby boomers and they were hit pretty hard by the last 7 years. They have been stuck at home or in apartments or, if in Portland, in Tiny Homes! They are finally starting to settle down, get a decent job or become more comfortable with their current job, have a baby, etc This encourages movement from rentals to ownership. Yes, a lot of Millennials love the urban life, but LGIH is working in Texas, NC, SC, AZ, and other cheap to build places where they are not competing with cool urban areas. (FYI, I sold a home in Norther VA in 1999 and it was small, but every couple that came through had 1 or 2 young kids and were dying to get out of an apartment. Sold in 1 day, but the market was hot then).

Why doesn’t Toll brothers come in and crush them? I think they are going after larger, higher-margin homes, leaving a niche for LGIH.

How big can LGIH get?
Maybe not huge. It might be easy to double or triple, which none of us would mind, but I don’t see them knocking off the big boys.

LGIH is my third largest 1YPPEG holding* and I intend to keep adding to it as funds become available.

*this excludes INFN because I was heavily invested in that before discovering 1YPEG.

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I looked at Zillow to take a lazy way to check monthly payment price sensitivity to interest rate increase. The house was $155,000 and there was $31,000 down so $124,000 loan. I should have picked a higher priced house.
Anyway, an interest rate increase from 3.358% to 4.334% resulted in a payment increase of $44/month.
I draw no conclusion as to the impact of that on LGIH sales, just offer a data point.

KC, no position in LGIH (but a landlord so the discussion is of interest). The payment increase is 5.85%. What is the future of rent payments compared to this???

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If LGIH is making quality homes the cost of home repairs and maintenance should be minimal for (I am guessing) probably about 5 years. I recently lived in a new home for about 3 years and there really was not much to do. My current home is 35 years old and there are regular repair expenses.

Gary

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I think that the key issue is that the apartment rent will go up every year but the mortgage payment won’t. After five years the mortgage payment will be a LOT less than the potential apartment rental.

Plus you are building equity. But that’s just secondary compared to the freezing of the basic cost.

JMO

Saul

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http://news.investors.com/112315-782074-existing-home-sales-…

Nothing too exciting…

Existing-home sales fell 3.4% in October to annual rate of 5.36 million, the National Association of Realtors said Monday, as the supply of properties for sale continues to dwindle. But so far that hasn’t translated stronger activity from homebuilders such as D.R. Horton (NYSE:DHI), KB Home (NYSE:KBH), Lennar (NYSE:LEN) and LGI Homes (NASDAQ:LGIH)…
October housing starts fell sharply last month, the Commerce Department said. Commerce will release new-home sales data for October on Wednesday.

Interesting to see how lower housing starts affect LGIH going forward, certainly has not caused a selloff. Built in now?

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Has to be good news for LGIH!
Saul

U.S. Home Prices Climb More Than Expected In September

11/24/2015 9:24 AM ET
Home prices in major U.S. metropolitan areas rose by more than expected in the month of September, according to a report released by Standard & Poor’s on Tuesday.

The report said the S&P/Case-Shiller 20-City Composite Home Price Index increased by a seasonally adjusted 0.6 percent in September after inching up by 0.1 percent in August. Economists had expected the index to rise by 0.3 percent.

On a non-seasonally adjusted basis, the index rose by 0.2 percent in September after climbing by 0.3 percent in the previous month.

The continued increase in prices pushed the annual rate of growth by the 20-City Composite Home Price Index up to 5.5 percent from 5.1 percent.

“Home prices and housing continue to show strength with home prices rising at more than double the rate of inflation,” said David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices.

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Is LGIH on Kevin’s Google 1YPEG spreadsheet?

If not, can someone who is already in LGIH add it? I would but am not familiar with the numbers or company.

Thanks,
Robert

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Is LGIH on Kevin’s Google 1YPEG spreadsheet?

Can anyone add? Saul went and collected and published the numbers a while back (new earnings since. I was planning on recreating his work for myself to prove I could find the same numbers. At the same time I could update some Google docs and Neil’s website. Do I need access to write to the google docs?

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As far as I know anyone can add, at least I can and I didn’t ask for special privileges. I like the ‘honor’ system of it personally, obviously we need to verify everyone’s numbers (even Sauls, nice job btw), but its a good start and builds trust. I believe kevin downloads the spreadsheet so if someone really trashed it he could restore it.

If you have or verify the numbers, I say go for it. I update the stocks I follow, but just started looking at LGIH and don’t feel comfortable doing that one myself.