I have been “writing” a post for several weeks. It continues to collapse from its own weight. Will never get finished. So, I will post parts of it under this thread.
First part returns to the negative operating cash flow. I wanted to understand it and I was curious whether this metric might contribute to the market’s low assigned p/e.
As to the latter, I think not. At least, not automatically. While a stock screener might reject LGIH due to this, anyone interested enough to look at operating cash flow would likely also understand its meaning in the case of LGIH.
What is that meaning? The negative operating cash flow is a result of LGIH growth. The major contributor is “net increase in real estate inventory”. For nine months this increased $143,055,000 compared to net income of $51,826,000. Along with other operating cash flow the result was negative $66,963,000 operating cash flow.
While normal ‘coffee shop’ conversation would characterize the increased spending on lots and houses as “investment for growth”, in accounting-speak it is not investment but operating cash flow. Just the way it is.
Compare Casey’s accounting for growth. Coffee shop version would say they are investing for growth, too. In this case, accounting speak would pretty much agree. Although CASY did have inventory increase of over $7 million in fy 2016, the bulk of the growth spending was investment in property and equipment, $392 million. Casey’s net income was not enough to cover this but depreciation and amortization and deferred taxes were more than enough to give them positive cash flow for operations and overall (FCF?). So Casey’s spending on property and buildings is ‘investment’, but LGIH’s spending on property and houses is inventory and that is just the nature of the business because LGIH sells property and buildings and CASY sells pizza and gasoline.
One final note, before this post also crashes under its own weight. Since LGIH has negative operating and investment cash flow, the difference has to come from financial cash flow. That is borrowing and stock issuance. It is important to understand the amount of future stock issuance that will likely be necessary, but that will be for another post. (along with putting p/e in context of cyclical industry stocks)
KC