LGIH financials

Investment Analysis Clubs Saul’s Investing Discussions
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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

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Frankly I’d rather see a company building a landbank than blowing cash on an inventory of perishable pizzas. Not worried in the least - if they can buy land whilst they have cash coming in and land is cheap then do it. All Developers need to build up land banks especially ones that are growing gang busters.

Can’t believe I’m the only replier to a 12 rec post. Maybe responder posts collapsed under their weight.

Ant

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I wanted my next subject to be LGIH’s p/e. I think there are significant comments to be made. But in gathering info on the industry I came upon two web sites that provide some background where LGIH is positioned.

builderonline.com
probuilder.com

Builderonline.com lists 200 home builders. LGIH is #15. This listing is ranked by number of houses sold. Probuilder.com lists 100 companies and ranks by revenue.

The top 15 from buildersonline are all publicly traded. Of the remaining 185 companies, 8 are publicly traded. #16 “company” is Habitat for Humanity. #14 company is M/I Homes. M/I Homes has revenue 2.25 x’s that of LGIH. Habitat for Humanity has revenue 2.14 x’s that of LGIH. In fairness, I think Habitat has sales of building materials so revenue per house is distorted to a degree. But, clearly LGIH’s #15 ranking reflects its market niche concentration on starter homes.

Probuilder’s rankings place LGIH as #34. One of these sites (probuilder, I think) has some “letter grading” on the companies reflecting a wide range of metrics (some mentioned, not all listed). These are interesting as the best and worst metric for each company are listed and you can see which have declining lot inventory, ratings on sales/marketing, debt/equity, etc.

Of note is that LGIH has high grading on sales/marketing and is #1 in “sales/community/month” at 5.5. As a comparison, KB Homes at #5 or #6 had 3.1 per month (@$*!@!! notes!!!) I think LGIH was also #1 in "unit backlog with an increase of 244%.

LGIH has stated they will be in all the top 50 real estate markets by year 20xx (notes, again). Need to look again at a listing of top real estate markets and see in which LGIH is currently active, and see what growth opportunity the remaining ones could provide. One of the top builders (notes!) had revenue of $10.6 billion. I made some average sales price adjustments and determined that LGIH could have a 10x growth potential. If they doubled revenue they would be #7 position (by revenue). Tripling would move them to #5, quadrupling to #4…

One last note, #5 on the builderonline list was a merger now named CalAtlantic. Not that LGIH is a merger or takeover candidate, but just to note that there was some consolidation in this highly fragmented industry.

All this just background for a later post on LGIH’s p/e.

KC

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