As noted, LGIH sales growth is slowing without considering January sales. I am curious as to why management has chosen to grow so quickly. There has been a strategic decision to grow beyond the rate that net income would allow, beyond the rate that leveraging the income by borrowing would allow, and to a rate that requires issuing new shares at the market price.
This is not a tech company that is grabbing market share to become dominant. I don’t see them being in a race for market dominance in home building, or home building for first time buyers, or home building for first time buyers in Texas, or …… Does anyone see a strategic business reason to pursue maximum growth?
I believe slower growth is good, or would be as long as it is by choice and not by soft market conditions. What I wanted to look at was how much growth they can obtain by just reinvesting net income, and therefore, what are the ramifications of pursuing 30%, 20% 10% growth. I used Q3 2016 and Q3 2015 information. Cost of goods sold, sales expense, and general and administrative expense increased nearly in proportion to sales revenue. Sales decreased from 8.6% of sales to 8.1%, and G&A decreased from 5.5% to 5.2%, so there were efficiency gains to some extent. But for the analysis I assumed a linear relationship. The $602 million sales for three quarters cost $524 million in CGS, sales, and G&A. The after tax net income was $51.8 million. They can increase spending by %51.8 million, from $524 million to $576 million or by 9.9%. By using leverage they can increase by almost 15%. Growth beyond 15% requires issuing more shares.
For 30% growth, they need another $52 million above and beyond levered net income. I think the market cap is about $635 million so dilution of about 8% is need to fund the extra 15% growth.
For 20% growth dilution of 2.5% is needed to fund the extra 4.7% growth. 15% growth would require no dilution. 10% growth would require no leverage and the debt to equity ratio would begin to fall.
I would appreciate feedback on the method and accuracy of this analysis. I don’t believe the market is rewarding LGIH for its growth. In fact, the p/e is depressed due to high debt needed for the fast growth. I would be content with sub-15% sales growth and improved balance sheet. As a core, longer term holding, 10 to 15% share price appreciation through slower growth and p/e expansion would suit me just fine.