Problem/issue/question: LGIH goal is to be top 10 homebuilder “in a few years”. What growth rate does that imply and how much share dilution will it require? The top 10 reference is to Home Builder magazine ranking and is based on number of houses sold.

2017 LGIH rank is #15 with 4,163 sold. #10 is Toll Brothers with 6,098 sold. LGIH average sale price was $ 201,300. Sales prices have increased 9% per year. Communities have increased 23% per year. Train ‘A’ left New York at 3:47 a.m. (ooops, wrong problem).

Assuming, for some simplicity, that Toll Brothers does not increase sales, the target is 6,089 homes. For first cut, assume that “few years” means 3. 6,098/4163 = 1.465. 1.465^.333 = 1.136, or 13.6% annual increase in homes sold. If absorption rate stays the same, and LGIH has 69 active communities, then in 3 years look for 1.465 x 69 = 101 active communities, or 78, 89, 101 in the next 3 years.

LGIH net margin is 9% and they can leverage that 1.5 times. 9% x 1.5 = 14.5%

Sales unit increase needed is 13.6 and sales price increase yearly is 9%. 1.136 x 1.09 = 1.238. 23.8% annual increase in cost of sales is implied. Gross margin is about 26%, cost of sales = 74%. Cost of sale increase is .238 x .74 = .176 (17.6%). Where do they get the money to fund the growth?

9% comes from the net income from last year. This can be leveraged 1.5 times, an additional 4.5%. That leaves 4.1% of revenue to be raised from sales of shares. Sales were $838 million. $838 million x .041 = $34.4 million. Market cap is $618 million. $34.4/$618 = 5.6% dilution needed each year.

So, in three years, revenue is 1.9 x $838 million = 1.592 billion, net income $143.3 million. Shares increase 17.8% from 21.3 million to 25.1 million. Income per share is $5.70. P/e of 9 yields price of $51.27, p/e of 10 yields price $57. Share price today is $32.87. Increase is +56%, 16% CAGR, or +73%, 20% CAGR. Assumes a zillion things including no share dilution from compensation. Not Shopify grade growth but several times more than what I need.

6,098 sales for 101 communities is 5.03 absorption rate. 101-69 = 32 new communities. Assume in smaller markets, 3 communities per market requires 11 new markets. If 4 per market, then need 8 markets. They need to add 3 to 4 each year. At one time they stated a goal to be in all the top 50 markets.

This looks to approximate their road map.

KC