Here are some thoughts on the LGIH home closings recently announced. First, here is the full history since the IPO:
Q1 Q2 Q3 Q4 YEAR YoY
---- --- ---- ---- ---- ---- -------
2013 505
2014 485 662 557 652 2356
2015 671 853 934 946 3404 +44.48%
2016 844 1128 1052 1139 4163 +22.30%
2017 **761** *1313 1313 1313 4700 +12.90%*
* YoY Growth = Rate of change of YoY Column
**bold** : Current Quarter
*italic*: Projected future numbers based on company guidance
Thoughts on … Finances
While Q1 numbers are lower than hoped for, overall it appears management’s number is still achievable. For the remaining 3 quarters they need an average increase of 18.68% in closings per month. Considering the growth rate in closings previous years, this is seems like a number which is still easily possible to achieve.
… Management
Management has shown a high degree of competence since the 2013 IPO. While I certainly am aware that surprises can happen with no warning (INFN, SKX), LGIH management has earned some trust from me and so far I see nothing to disprove that trust. Perhaps this year will change that but I am not going to borrow trouble.
… World Events and Macro Trends
I am not at all surprised by the Q1 number. Uncertainties surrounding the election combined with holidays probably had a huge impact on November and December sales (which equate to January and February closings because of the typical 2-month delay between sale and closing). I also expected a low number March closings because of general worry over what would happen after President Trump took over.
… Guidance
LGIH also had insufficient completed homes in inventory to meet the demand in sales. Here is the statement from the Q4 2016 earnings call (7 March 2016):
Closings for the first few months of the year have totaled 396, which is less than the 477 clothing that we started last year with. The primary reason our closings are down year-over-year is our inventory of completed homes was not as high as we would’ve liked.
We ended 2016 with 1,560 homes at various stages of construction, compared to 1,710 homes at the end of 2015, giving us fewer homes to close in the first quarter of 2017. We believe the situation will correct itself over the next few months as we are bringing in new inventory online, both in the forms of home construction and new development sections due completion.
Assuming the inventory shortage can be corrected, this is likely to lead to an increase in closings over the upcoming months. This not only decreases my concern over the low closings for Q1 2017, it has me more optimistic about closings throughout the rest of the year. In order to have a shortage in closings, demand needs to be high. Most likely at least some of that shortage will show up as extra sales in upcoming months.
… Mortgage Raes
An unknown external factor is mortgage rates. There has been a lot of talk in the news about rate increases by the federal reserve this year, but keep in mind this is only indirectly linked to mortgage rates. Even assuming mortgage rate increases, it is not clear to me how will necessarily effect LGIH sales. Assuming the federal reserve stays with small changes (very likely), the argument for home ownership does not change significantly. Only the cost of the home a person can afford will change. Some LGIH customers may no longer be able to afford the loan but other potential customers originally looking at a more expensive house may consider the budget friendly alternative offered by LGIH.
Conclusion
At the moment, I am not concerned. At the current price my personal belief is that LGIH is somewhere between mildly undervalued and fairly valued. Either way, I see no reason to either buy or sell shares as a result of the March closings report.
I will be watching closely over the next few months. Q2 2017 should give a better insight to the trend for this year and I will be very interested to hear what management has to say during the next earnings call in June.