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