LGIH earnings on 5/9

LGI Homes will announce Q1 results before the market opens on May 9th.  I know Saul is out but some of us
are still in.  I believe Saul was correct to exit.  Not for the reason stated (the need for endlessly
needing increased borrowing), but simply based on valuation on an historical basis.  I have been 
attempting to produce a “page post” ala TMF1000 over the last several weeks.  My hat off to TomE for his 
ability to produce these things.  I am determined to finish it but the Q4 post may not beat the Q1 
earnings on the 9th.

I hope the tone for Q1 has been set.  LGI Homes announced April closings and they were superb.  606 homes 
closed versus 365 a year ago, a 66% increase and an absorption rate of 7.7, the highest ever for an 
April.  One disappointment is the community count of only 79.  

As far as Q1 results are concerned, the important number is gross margin.  In Q4 it was 24.4% compared to 
27.2% for Q4 ’16.  The average sales price increased 5.1% to $219,618, but the cost of sales increased 
more.  Management indicated that they were slow to raise prices so it will interesting to see if the 
gross margin has stabilized, improved or deteriorated.  They obviously are not having problems selling 
homes, but what is their pricing power?

Some numbers I gathered for my page post that show the increase in cost:  

		Cement	        Lumber	        Carpenter

2016		158.5		132.2		28.42

2017		163.1		159.7		29.31

current		163.1		172.4		29.43

Lumber up 7.9% in 2018, carpenter up 0.4%.

Another item to look for will be the increase in inventory compared to net income.  One positive trend 
has been the percent of total cash spent that came from net income.  For the years from 2014 to 2017, net 
income provided 12.5%, 37.2%, 41%, and 62.3% of total cash spent.  Although LGIH is a borrowing machine, 
it is becomming less and less dependent.  Its growth is still constrained by the covenants of its line of 
credit from Wells Fargo.  LGIH is growing just as fast as the restriction on the number of speculative 
houses it can have in inventory.  But its need to borrow, percentagewise, is decreasing—which is good in 
a rising interest environment.  The LIBOR rate which sets the Wells Fargo interest rate increased from 
0.25% in 2014 to 0.72% in ’16 and 1.49% in ’17.  I don’t have a current number.  30-yr fixed mortgage 
rate from 2013 to current are 3.98%, 4.17%, 3.85%, 3.65%, 3.99% and 4.44%k currently.  These rates have 
not reduced sales nor impacted cost of sales noticeably.

As always, we will look at the number of quarters of lots in inventory to see that it is neither 
increasing or decreasing too much (indicating over purchase or slow sales for increase, or lack of 
inventory to produce sales growth if decreasing too much).

KC, very long LGIH
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Just to add comment on still being invested in LGI Homes, or perhaps more to the point of not selling and forgetting. I understand the logic behind the importance of what is currently owned versus what was sold. But again, to point out that our investment is not in dollars only. We invest time to understand companies in which we are/have been invested. In the case of LGIH, I posted about the “fat pitch” I saw on 1/29 where I purchased what is now 3.4% of my IRA holdings. Well, it wasn’t the greatest but it is up 6.4% in about two months. Two weeks later I added a smaller amount that is up 9.7%, and another two weeks later added more that is up 26% in a month. Unfortunately, I fouled off the first two fat pitches and had to guard the plate (i.e. my portfolio) and just put the ball in play on the really fat pitch. Added sequentially smaller amounts.

Of course Saul does keep at least one eye partly opened on his sold companies, else he would not be back into TWLO (which I am not, sigh). Uhmm, I guess there is a difference between awareness and concern. One can be aware of stocks sold and yet be unconcerned if they outperform.

KC

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KC FWIW in the interests of pooling / sharing perspectives and positions. I missed the absolute top but sold 50% of my position recently in mid 70s.

I expect to sell the other 50% in next 5 months before 1) Interest Rates accelerate and have an impact 2) LGI faces stiff year on year comps 3) Before any potential economic downturn happens 4) Before construction cost inflation starts really hurting.

I kept half partly because I think they are undervalued and the market isn’t valuing them well, partly because they are a class act and have a long term track record to prove it, also because US is under constructing property to meet demand and partly in case the fiscal policy stimulus delays any recession and keeps the party going longer.

Sorry this isn’t a fully baked decision analysis model with a singular outcome but that’s where I’m at.
Thanks
Ant

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Do they have any kind of target for new communities opening?

I am holding but watching construction costs and interest rates closely, though I still don’t feel like rising rates will have quite the impact that others believe, especially considering LGIH communities are moderately priced.

I just heard an NPR piece yesterday about how the drive for Millenials to own homes is higher than ever. Rent continues to rise in most places and in a lot of locations a mortgage on home can be close to if not lower than rent rates for anything more than a studio apartment.

There’s also a growing trend of people leaving overcrowded/overpriced big cities for more affordable areas. A lot of LGIH communities are in some of the fastest growing parts of the country.

I don’t know how much any of this will matter if there is a slowdown/pull back in the economy however.

For another FWIW, I think LGIH will beat the top end estimate by quite a lot. Maybe make $0.92 versus $0.78 mean, $0.82 high estimates. I’m using 23.5% gross margin and 24% tax rate. 13% SGA. $219,000 ASP. O.k., we’ll see how badly embarrassed I am next week.

KC

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Invain,

Yes, they target a broad range of between 85 to 90 active selling communities at year’s end, and 6,000 to 7,000 sales. But at the current TTM absorption rate of 7.2 and an average of 84 communities during the year, they would have 7,260 closings.

KC

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I expect to sell the other 50% in next 5 months before 1) Interest Rates accelerate and have an impact 2) LGI faces stiff year on year comps 3) Before any potential economic downturn happens 4) Before construction cost inflation starts really hurting.

I’ve sold about 3/4 of my LGIH, some in the $60’s, some in the $70’s, and I plan on selling the last batch before earnings are announced next week.

Why? Because of Ant’s #2 above. The tough comps are coming up very quickly, that will make the growth rate look like it is slowing significantly IMO. Don’t know if it will happen like that, or if the market will care, but that’s my biggest fear. And the fact that so many companies so far have announced really GREAT earnings for Q1, but with muted guidance and have been punished big time for the “slowing growth”.

LGIH was a great stock for me, all purchases were between $20 and $50, so made quite a bit in a relatively short time period, happy to have been a part of it and thankful to this board for bringing it to my attention! Will watch the upcoming earnings mostly just to see if I made the right decision in exiting the last of my holdings before the release and hopeful learn something in the process.

Good luck to all!

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O.k., let’s get some of the embarrassment out of the way before earnings are released. “Upon further review”, and considering accounting 101 fixed costs…, I believe the correct % for SG&A for the quarter should be 13.8% more or less. And that reduces eps to $0.83 to $0.84. That 0.8% increase in SG&A drops the net income by 10% when dealing with net after tax margins of 8 or 9%. My bad, blush. 13% SG&A is more reflective of the entire year including the high revenue quarters.

KC

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How about a final answer? I promise. X I’m now looking $0.83 to $0.84. Let’s give a little more detail. One thing is known. Closings: 1244. First question: ASP. Data. Last quarter 219,618, 5.6% increase over year earlier. Year earlier ASP was $207,928, 11.3% increase. This was followed by Q1 ASP of $214,075, 11.2% increase over year earlier. This tells me that maybe there is no seasonal change in ASP from Q4 to Q1 (which maybe would occur if Q1 sales were skewed towards warmer weather areas which happen to have lower priced homes). Year over year % increases similar Q4 to Q1. One of my trial estimates used an increased ASP of $220,600, a $1,000 bump because management stated that they were slow to raise prices. But why not a 5% increase to match Q4 17 over Q4 16 increase? I think that gets us to $224,000. Thus, Q1 revenue of $278,656,000.

Now, previously I used 23.5% gross margin. But management projected 24 to 26% for 2018 (GAAP). NonGAAP is higher but the lower GAAP uses capitalized interest which is the actual accounting used to get to EPS. Interest paid is added to the value of inventory and thus cost of goods sold. So, what the heck, go with 24%. That gives us $65,384,640 gross income. G&A as an absolute number has been increasing quarter to quarter. I’m going to increase it to $17,200,000 which is 6.3%. And Sales as a percent of revenue seems higher in Q1 versus other quarters and I wonder if expenses flying sales personnel to Texas for training is higher in Q1 when sales activity is maybe slower. About 0.8% higher than other quarters and last quarter it was 7.1% so I’m going with 8%. Therefore, 14.3% for SG&A. This has a major effect. If sales expenses are not seasonally higher then earnings or $.05 or $.06 higher. But, 14.3% leaves $26,426,292 and 24% taxes leaves $20,083,981 after tax or $0.83 to $0.84 per diluted share. Without that presumed higher sales expense it would be $0.88 to $0.90 per share. This year’s revenue is 68% higher than '16 or '17 so that higher sales expense % might be overstated…

Sorry for the long-winded post but at least this gives more detail to check against the actual results and having it recorded will help me for next quarter’s flail.

KC

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Full disclosure, I sold out of my last LGIH this last week, so I’m just a bystander at this point.

Sorry for the long-winded post…

All good stuff, KC, I’ll give my less detailed short-winded version.

Closings are known, we all know ASP will go up some, growth for Q1 will look amazing compared to last year’s numbers, but everyone already knows all this, so is already priced into the stock price. I think the stock will move up or down solely on any forward guidance/color they give, and I think the growth there is going to pale with the harder comps compared to the last year of results. That’s were I put my money (or actually took it off the table), hope I’m wrong for those that remain long.

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