LGIH: Monkey uses and Abacus

Investment Analysis Clubs Saul’s Investing Discussions
1

Hello Friends,

Monkey isn’t too good with numbers, so his abacus helped him calculate the following:

For the last 12 months, LGIH has made 0.57 (this quarter) + 0.69 + 0.76 + 0.66 bananas. The abacus says that’s a total of 2.68 bananas per each share you own of this company that builds and sells shelters for non-jungle dwellers.

Today on the open market, you can get yourself a share of this home-builder’s business for 26.68 as of this writing.

That means you are paying 26.68/ 2.68 or 9.95 times per banana of profit, or, in Wall Street-ease, the p/e is 9.95. That seems like not that much to pay considering the company is growing its profit in bushels.

If the p/e were to expand to, say, 12.5, which is still on the cheap-side of home builders–– 13.79 (Toll Brothers); 12.27 (Lennar); 14.69 (KB Home); 13.51 (D.R. Horton)––the share price would be 33.5 bananas.

So the difference between the current price and the price at a p/e of 12.5 is about a 21% increase. Which suggests to Monkey and his abacus that if the p/e goes up to 12.5 then this will be a good investment, short-term.

Any thoughts on what might allow for such a p/e expansion?

Humbly Yours,

Monkey

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2

How about this, Monkey: We get a lot of people to buy a lot of shares
:slight_smile:

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I shouldn’t be joking. I and probably others on this board have a significant position with LGIH.

Not fun today.
Frank

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Hey Frank,

Happy Foolversary!

DT

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Thanks DT :slight_smile:

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Any thoughts on what might allow for such a p/e expansion

Human nature. LGIH has gone fro $17 to $36 to $20 to $30 during the year. Mostly on p/e expansion/contraction. Now, as Saul says, it crashed all the way back to last Friday’s price.

So much “granularity” in the conference call. Granularity is useful to humans in the process of finding something to wrap the big brain around. I’m just a goat farmer. LGIH projects $3.00 to $3.50 for FY 16. A p/e of 10 gives you $30 to $35. An exuberant p/e of 11 yields $33 to $38 (rounded down to whole bananas for the smaller brained).

$30 is a yawner. $38 would provide Saul-esque returns. I like LGIH here, even with no or just slight p/e expansion. In fact, I hate it when the p/e expands noticeably. That leads to decisions on selling to lock in profits which taxes my brain.

KC

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