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!
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!)
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.
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.
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