LGIH hard look

Hard look at LGIH

My portfolio has more companies than Saul’s because I follow one of the SuperNova portfolios. I own most of the 30-odd companies in it. My lowest weighting goes to my own starter positions and the SuperNova picks for which I have no great enthusiasm. The companies get a point for high confidence (either mine or MF), paying a dividend, or being one of Saul’s holdings or earlier picks. So four points max. I am not fully invested right now. LGIH is my largest holding. I have a full allocation in it. There are seven other companies with the same model weighting, and one that is higher (CASY). But the highest actual investment right now is LGIH. Therefore, it seemed to behoove me to look at the brokerage company’s ranking and analysis for LGI Homes.

A lot of the ratings are technical analysis so I ignored those. But one somewhat fundamental analysis came up SELL! That seemed worthy to read in detail. Most of the performance and valuation metrics were quite favorable. There were five numbers, though, that could be of concern.

Three of them are cash flow. Operating cash flow is negative $133.77 million. Free cash flow is negative $6.1 million. The % cash flow to sales is negative 16.9%. There were no peer comps to the first two, but % cash flow to sales for peers is negative 0.6%. Cash flow analysis gives me heart burn. I know (?) that growth companies will often have negative cash flows. But I need to pay another visit to the quarterly. Don’t know if it will be a one beer or two beer job, but at least I can walk, not drive to and from the desk.

The other poor comparison is price/book which is 2.1 for LGIH and 1.0 for the peers. Looking at my notes (always terrible) I don’t see any scribblings about book value growth…. But the P/B could be supported by LGIH growth in revenue and earnings. I don’t want to make a table so I’ll ignore the 3 year CAGR numbers. Year over year rev growth is 38.5% for LGIH, 19.0% for peers. EPS growth is 50.9% vs. 19.2% so that could explain the higher P/B on a forward looking basis. S&P 500 numbers are 0% on revenue and negative 3.5% on EPS (all these numbers from the report). P/E for LGIH was listed as 8.4 versus 10.3 for peers.

Oh, yes, the long term debt to capital. 67.4% for LGIH. The highest rated peers (Meritage and Toll Bros. with buy ratings) were about 45% and 46%. LGIH debt is currently limited by the covenants with the lenders and LGIH operates pretty close to the limits. The debt ratio won’t get worse although share issuance should be expected…2018? Depends on how attractive/urgent the new markets are.

Negatives Summary: negative cash flows, high P/B, and debt level.

However, LGIH compares favorably to Heritage and Toll Brothers for return on revenue. 8.7% for LGIH and 5.1% and 8.7% for the other two. And versus all peers, operating margin 13.1% to 7.1%, net margin 8.7% to 4.9% and return on capital, 11% to 4.0% (a little debt helps that).

Those are, I think, the microeconomic factors. Macro concerns are the cyclical industry, interest rates, general economy. But the report had a neutral rating on the industry and sub-industry.

Right now these are just numbers. This type of A,B,C,D,F or buy-hold-sell ratings are not very informative. A good bear article on Seeking Alpha gives one more to chew on. Just numbers. Empty calories. No texture, no flavor, no feel for the company’s management, strategy, culture…. Maybe I’ll just have the beers and forget about the cash flow….

Well, Happy Thanksgiving to all Stateside,

KC

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