LGIH financials

I’m going to post this as-is because it is already a week past its shelf life. Saul posted recently about LGIH revenue and earnings growth and p/e. This will talk a little bit about the p/e. It gets to a point of discussing NASDAQ website Guru Analysis and then it ends. I’m not going to finish that part right now and still have an analysis of the options thAT LGI Homes has to “improve” its cash flow and debt “problems”.

So, a three subject post: 1) investing in cyclical industries, 2) comparison of p/e’s among LGIH and its industry peers, 3) a search for reasons for the low p/e of LGIH and grading the market’s concerns (very partial).

Cyclicals. I don’t have the slightest experience in investing in cyclical industries as a strategy. However, a quick google of key words such as ‘p/e’, ‘cyclical’, and ‘investing’ directs to numerous articles which say “buy high, sell low”, as far as p/e’s are concerned. The common knowledge of the market is that there is a degree of boom and bust so the stocks are not richly rewarded in good times nor severely punished in the downside of the economic cycle. As a result, the high “e” during the up cycle gives a relatively low “p”, thus a low p/e when the economic cycle is toward the top. At the bottom of the cycle the price is supported by the “knowledge” that good times must be ahead and so the low “e” earns a relatively high “p” and therefore a high p/e. This is even more so if the company pays a dividend. Assuming the market forecast on the economic cycle is correct, you buy the high p/e at the beginning of the economic up cycle and sell the low p/e at the beginning of economic down cycle. A lot of the home builders have had strong earning increases of 25% over the past couple of years, and the recovery is what, 6 or 7 years old? So, we need to look further for indications of where we are in the p/e cycle. I suppose we would have to go back to 2007 to look at the beginning of down cycle. But that was not your garden variety economic cycle. So even that might not be instructive and I didn’t come across the data. The p/e’s of the three largest home builders have been decreasing. DHI has ended the last four years with p/e’s of (very roughly based on eyeballing year end chart data) 18, 16, 13, and now about 12. LEN ended at 15, 16, 14 and 12. PHM had an odd p/e of 4 but then 17,13 and 12. This shows the falling p/e in an up cycle but again, we don’t know how low is typically low.

LGIH Versus Peers. I have 22 home builders listed. I threw out three: one had no earnings, one had a p/e of 102 and one had 2.68. Of the remaining 19, the average p/e is 13.66. The median is 12.55. The three largest companies have p/e’s of 11.93, 12.55 and 11.84. The high p/e is 24.88, and the low p/e is 8.77. LGIH has the second lowest p/e, 9.26. Unfortunately this is a single data point based on the closing prices on December 16. The market knows LGIH has a relatively low p/e and doesn’t care. It is not rewarding LGIH’s superior growth in revenue and earnings. LGIH is a growth company in a cyclical industry and is being priced as an inferior cyclical company. Century Communities is in the same boat. Definitely a clash in valuation criteria and the cyclical investors are in charge right now.

As far as the cycle is concerned, I suppose that three issues are the economic cycle itself, interest rates and housing supply. My own guess is that the economic expansion still has legs, increased interest rates will be small and not significantly reduce the number of qualified buyers, and the housing shortage will be persistent for years (then add economist-speak such as “barring unexpected economic shock”).

This would mean that LGIH would build more and more homes and make more money and the share price would increase, but not as fast as earnings, so even lower p/e may be ahead. Nothing very revealing here.

Why Does LGIH Have a Low P/E?

I suspect three reasons: 1) negative free cash flow, 2) high debt to equity, 3) earnings comps.

In digging into the homebuilders, I happened upon the NASDAQ web site while hunting financial ratios and p/e’s. They have something they call Guru Analysis. What they do is use the investing guidelines or screens of presumably famous or influential investment professionals or groups and analyze a company on those basis. These are Lynch, Graham, Validea, Motley Fool Small Cap Growth, Zweig, O’Shaunessey, Fisher and Dreman. Some of these are value, some are momentum, some are small cap growth, etc., etc. In many cases, trying to apply the criteria to the whole spectrum of stocks is just silly, but let’s look at a couple.

What does Zweig Guru say’.


A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. LGIH’s Debt/Equity (107.38%) is considered high relative to its industry (59.56%) and fails this test.

Sorry, That’s All Folks,



Thanks KC, interesting explanation of cyclical industry pricing.

I’ve been surmising that LGI may be currently held back a bit by tax loss selling as well,
being that it’s essentially around a 26 week low point. Down from $40.



I’ve been surmising that LGI may be currently held back a bit by tax loss selling as well,

Could well be. For example, on Wednesday the homebuilders were not trading in unison. Whereas LGIH was down what, 4%+?, DHI was down only 1.5%, PHM wS UP .9%, and CCS was up 2.86%. All on no news. So maybe year end buying/selling in low volume market is significant. One more day.


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Thanks KC. Really interesting!

Thanks for your hard work and analysis. Very interesting.

Thanks KC. Really interesting!

Saul, with the “doom and gloom” surrounding LGIH by some, just curious as to whether you have trimmed your position this month. My recollection is that it is has been your largest position for a few months now.


Hi Speedy, I had trimmed it some on the way up from $30.00 to $38.50 to keep it from getting too big. On the way down I trimmed a little more to diversify a bit. However, since you were asking about this month, this month I actually added a little (perhaps not my best timing). It’s still my largest position at a little over 13% of my portfolio.



KC, I can’t help wondering whether that debt is very deceptive and comes about because they are growing so fast and opening new offices and communities, and having to buy all the lots in those communities before getting started selling. If you subtract the real estate they own I’d guess the debt would be a lot smaller percentage. And they carry the real estate at purchase price although it constantly rises in price. Just saying.


Thanks Saul.

I added a bit to my position earlier this month, but haven’t bought or sold any shares since.

fwiw- I agree with what you posted recently, words to the effect of it being too short-term of a view to focus on one quarter.

Have a very happy and healthy New Year!

fwiw, you could just look at the BS directly. I know zip about homebuilders so this is mystery to me but if you go to this link:

that’s the Q3 release

The BS starts on page 3. A few small observations:

*equity is 331km
*cash is abt 46m, Debt is ~355m
*all the other stuff on the asset and liability sections pretty much equals out except for one thing

676m in real estate inventory

If you look at the 10Q, that’s where all the cash flow is going. They could turn that off at any time and make the CF statement and BS look much prettier (course, that inventory is what they need to resell).

If you go to Note 2 of the Q, that inventory is made up of:

425m land
11m sales offices (will be sold eventually)
146m homes in progress
95m completed homes

Land and to a less extent homes in progress are the two areas they are spending money on.

I’m going to stop here, but that debt/equity ratio on that canned site doesn’t tell you anything cause homebuilders by definition - I think - hold large amounts of inventory where they build houses and such - before they get built. So my guess is most homebuilders look kinda funny BS wise while they are in growth mode which LGIH is right now.

Course, to own this stock you ought to know something about those land purchases and future sales prospects for the stuff they do own. They say in the Q that the life cycle of a community is typically 2 to 5 years, so that’s a range you want to focus on. And in theory you need to think more than a 1 year out, cause if a slowdown comes you want to get a feel for when it will happen before it does happen - cause that’s when it is too late. At least, that is how I understand cyclicals work.

It is a pretty hard category for the casual investor…my biggest problem would be getting comfortable with management’s skill in buying land. Not sure how you do that, but I don’t follow this one or know much about homebuilders anyway.

just 2c



Gundlach, influential bond manager, is predicting 5% to 6% 10 year treasury rates in 3 to 4 years (link below). A few people have agreed with him. If true, home-builders will likely get to experience the down cycle of a cyclical - perhaps a truly horrific one for a while.

Course, who knows - the 10 year treasury is back under 2.5% as I type this, and predictions are always good when you make a lot of them (broken clock is right twice a day) but not very accurate otherwise.

Still, if you own cyclicals, you better pay attention to rates - and have a feel for where they are going. Just my opinion…



double P.S.

then again, homebuilders are pretty much all domestic (right?); if there is a corporate rate tax cut, they will benefit tremendously…


425m land

Based on the current closing, the company owns little over 7 years worth of lots. In an increasing and stable market it is a plus to go long on the land, as it ensure there is steady supply. If the expectation is market might slow down these land supply could end up hurting them.

Many builders post 2009 switched to options (option to buy) rather than straight ownership. This is a new company do we know whether the management has any experience with managing inventory on a down cycle?

On gundlach’s prediction, I am a fan of Gundlach. There are nuances to his prediction. We need to see how aggressive the new administration will be with fiscal stimulus, how big the tax cuts will be, as these two will directly drive both GDP and the deficit.

While there is lot of hope for 4~5% GDP growth, I think it could be just fleeting and it will be a challenge to have sustained GDP growth at those levels, thus the driver behind the high interest rates.

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KC, I can’t help wondering whether that debt is very deceptive


Was it that guy Buffet who said something like “earnings and revenue are speculative, debt is real”? Of course I know what your meaning was, that the debt to equity might be deceptive as the value of real estate has gone up.

Two points: In real estate, the value of the house itself (fairly recent construction and decent maintenance) is relatively stable. Replacement cost inflation. What is fluctuating is the value of the land. Supply/demand. So the danger of 7.1 years’ inventory (end Q3) is that the actual inventory value goes down and LGIH has to take an impairment (in the event of a downturn in the real estate market). The nightmare is that a decline in lot inventory value triggers the debt/equity covenants which might force sale of inventory that has tepid demand. On the other hand, the amount of annual interest is only (I think, memory of an approximation based on the (?) 4.25% interest rate on some of the debt) $16 million [caveat, check it out before you hang your hat on it]. So, I wasn’t worried about crushing debt (bankruptcy) but significant earnings impact.

Second: As posted earlier (I think), the book value of the inventory gets increased, in their accounting method, by interest and taxes paid on the inventory. This inflates the inventory value above and beyond the increased value due to real improvements such as streets, sewers, etc., etc. Maybe that is 2% per year on interest and the same on taxes???

Remember, I am noticeably long LGIH which has motivated this research and these posts. Still need to uncover the bear cases that are penalizing LGIH compared to its peers. And then there is the discussion of LGIH’s options on controlling its growth, and the share dilution needed to sustain current growth, and maybe a look at the size of those top-50 markets in which LGIH is not active.

I’m just holding my shares.



My take on the impact of increased interest rates on LGIH:

Although increases in interest hurts most home builders, LGIH is in a segment of the market which actually might benefit from an increase in rates.

One must keep in mind that LGIH caters to the first time buyer in expanding markets. So how does this make them different from the typical builder? As rates go up, inevitably the floor for loans will rise. This will drive a certain number of first time buyers out of the market because they will not qualify for more expensive loans. But while the floor will go up, driving x% of buyers out of the bottom, the floor for the intermediate home buyer will also go up, which will drive the folks looking for a new home into a lower price bracket. In other words, while LGIH will lose some potential buyers at the bottom of the market, it will gain buyers entering from the top of the price range.

Will the gain enough new buyers at the top of their price range to off-set the loss at the bottom? I can’t answer that question in a definitive way, but I will speculate that they the off-set will be more than adequate.

I think if you look at the history of home purchasing you will find that interest rates alone have only a small impact on home buying. If the general economy is doing well, if we see low unemployment numbers, rising wages, reasonably strong consumer confidence, etc. home sales will remain strong in spite of rising interest rates (up to a point).

Investment real estate will remain quite sensitive to mortgage rates because as an investment vehicle, real estate has to compete with a vast array of other investment opportunities, but LGIH builds new residential, single family homes. Investors generally buy multi-family dwellings if they buy a newly developed property. New single-family homes carry too much overhead for most real estate investors.


the recovery is what, 6 or 7 years old?

The housing market bottomed at the end of 2011 and the growth started around 2012. So it is less than 6 or 7 :slight_smile:

increased interest rates will be small and not significantly reduce the number of qualified buyers
In the past when I used the average monthly mortgage and the impact of that on the interest rate. That is, suppose LGIH has an average selling price of $200 K a @3.5% mortgage rate monthly payment could be around $890 vs $955 for 4% vs $1013 for 4.5%.

So the $125 increase is basically 15% higher monthly mortgage cost. Since LGIH caters to starters, people who are buying their first house, this is a segment that has very little disposable income and often with young families, a 15% monthly mortgage payment could evaporate demand quickly. My rule of thumb is demand could be impacted by 10% to 20%.

Typically, increasing rates also mean economy improving, thus higher employment and increasing wages. But we are already at record employment (please I am not interested in any political debate on this) and I haven’t seen any wage growth (at least for me certainly :frowning: ). The last few years we have benefited from low gas price and that could turn out to be a headwind.

So the impact on demand could be much severe and I would also suggest you to check out New home closing during “taper tantrum” period, I believe we have seen some wild bounces at least for the companies I followed at that time.

Why Does LGIH Have a Low P/E?

Typically home builders trade around 9~12 PE. So I am not seeing a significant discount. The last few years are outlier as the homebuilders were bouncing back from closings and many have carried significant deferred tax asset’s and skewing their EPS, etc.

A word on debt

Your concern is misplaced. I took a quick look at the 10Q and I see the debt is mainly revolver and a $77M 4.5% convertible notes. The company relying on revolver is a concern, i.e lack of permanent debt financing should be the concern.

Since LGIH builds spec’s (speculative building without a firm order), they need to maintain an inventory of houses to sell, that means typically 6 months of sales will be in inventory, this includes completed houses and houses that are under construction, etc and there are seasonable variations like spring sales would require higher inventory etc. But you should basically expect 6 months of inventory and land inventory. In an earlier post I mentioned LGIH maintains 7+ years of lot inventory. In summary I don’t think LGIH debt is high but I do have a concern that they are not having permanent financing and relying on revolver. It may be beneficial to lock in low rates. Perhaps they are not able to issue debt at reasonable cost hence they decided to stick with revolver (which are often lower rates but gets pulled out at the wrong time).