Article by a writer who met with management not expecting to be interested, toured a community with them, and ended up taking a moderate position. Nice discussion of risks as well. VERY worth the read. Some comparisons with other homebuilders as well (DHI for instance, which has lower gross and pre-tax margins in spite of having the advantage of scale, being 15 times larger). Also discusses the convertible shares, which convert in 2019 to a little under 4 million shares, and whether you should consider them as diluted shares now, or as debt. Very interesting article.
Saul
Summary
I didn’t expect to get all teary-eyed over a homebuilder, but after meeting management and touring a community, LGI’s differentiated operating model won me over.
The high short interest and low valuation are attributable to investor fears over the Houston residential market and broader Texas contagion - which are complete non-issues.
Even if Texas markets were to get tougher, LGI prospered during the downturn - it remained profitable, never took an impairment, and grew, while competitors struggled mightily.
I see 50 to 60% upside over the next two years if management simply meets its own goals, which it has a habit of beating. If LGI continues to blow the roof off, the stock could reasonably double…
It’s not every day that a company with:
significant insider ownership
beats its full-year earnings guidance by nearly 30%,
guides for over 20% forward earnings growth on top of that tough comp,
trades at a single-digit forward P/E despite a reasonable balance sheet,
does not appear to be anywhere near the peak of its cycle,
and somehow still has a double-digit percentage of shares outstanding held short.
Yet this is precisely the situation we find ourselves in today with entry-level homebuilder LGI Homes, which isn’t getting any respect from the markets …
http://seekingalpha.com/article/3958071-lgi-homes-houston-pr…