LGIH - My Mid-quarter Review
Who is LGI Homes?
This company was founded in 2003 and is headquartered in The Woodlands, a suburb of Houston. The company designs, constructs, and sells homes in Texas, Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina, and South Carolina, and is expanding into other states like Oregon. Their biggest market by far is Texas where they started out, but others are starting to catch up.
There are a lot of home builders. What is its secret sauce?
It’s not really a secret, but what they do is market to renters, first time home buyers, and say “You can have a home of your own for the same monthly payment that you are paying for rent.” That’s a very powerful appeal, as you can imagine.
Another thing that impresses me is that they have managed to be successful in Texas, in the middle of the oil-patch, in an oil blood-bath, so they probably know what they are doing and will know how to manoeuvre a bit better in the next housing downturn than their peers.
How do they do that?
They build a very simple home and build it cost effectively. This allows them to charge a low price for it. They have standard floor plans they build over and over. LGIH sends direct mail to renters in apartment complexes near its new-home communities, explaining how the renters can afford to own an LGI Home for the same amount or less than their monthly rents. Instead of advertising the price of a home, LGI touts the homes’ monthly payments of $700 to $1,000 a month.
A potential buyer is sent to the sales offices of a nearby LGI community, where they investigate whether they qualify for a low down-payment loan, perhaps a 3.5% FHA loan. Or for those with really good credit, LGI even offers “no money down” financing. If they qualify LGI will literally walk a couple out to a finished home they can buy. Many of them never even imagined that they could become homeowners.
That sounds dangerous. What if there is a recession and a lot of these people lose their jobs?
It sounded dangerous to me too, but as I understand it (correct me if I’m wrong), they don’t actually carry any of the mortgages. They just build and sell the houses.
What is your history with them?
I’ve been a stockholder for about five months now. They’ve moved up to be my fifth largest position. That’s probably because some of the other stocks dropped precipitously in value and they didn’t.
How successful have they been?
You wouldn’t believe it! Here are their quarterly sales revenues in millions of dollars for the last eleven quarters. And remember, this is in Texas, in the oil crisis!
Revenue was up 68.5% from 2012 to 2013, and up 58.9% from 2013 to 2014. It was up 65.1% in the first nine months of this year, so the law of big numbers hasn’t caught up with them yet. they haven’t announced their December quarter and year end yet, although they did pre-announce December quarter closings which were up 45% from the year before.
And here are their earnings over the same time. The March quarter (winter) is always slowest. I put those in italics so you could pick them out. (even though they are lower than the other quarters, just notice the sequence: 12 cents in 2013, 22 cents in 2014, 33 cents in 2015. Wow!)
Earnings were up 149% from 2012 to 2013, but up only 29% from 2013 to 2014. They are up 77% in the first nine months of this year, so they are re-accelerating from the 2014 pace.
Gross margin has been stable at about 28%, or I guess up from 27% two years ago.
The average home price was $149,000 two years ago and was up to $186,000 in the last quarter they reported. And they are selling twice as many houses a quarter.
How has LGIH stock been doing?
When I bought the price was about $31 but it has sold off like everything else, and is now down to $21.50 with a PE of 10.0 !!! (It’s actually been as low as under $20, with a PE of 9). I’ve kept adding a little here and there. With that current PE of 10 their rate of growth of 12-month trailing earnings is 50%. After the December quarter results are announced their PE will be about 8.5 at today’s price, even if quarterly earnings don’t rise at all sequentially.
What’s keeping the price so low?
I believe it’s two things. Fear that Texas, where they have a large proportion of their sales, will stop selling houses because of the oil price crash. However the price of oil has been crashed for what feels like a couple of years now, and they are still growing like a weed. The other concern is that interest rates may rise, causing mortgage payments to rise on new mortgages. I don’t see that happening any time soon, to be honest. And if it did, LGIH says they would just build smaller houses. Besides which, if that happened and homes became more expensive, apartment rentals would undoubtedly rise as well.
This again is more risky than SWKS, but not nearly as risky as SEDG, for instance. It’s younger than SWKS, it’s much smaller, and it’s in an industry (home building), which tends towards booms and busts. In addition, a rising interest environment will theoretically make it harder for mortgage payments to compete with apartment rentals. On the other hand, this company has found a niche, and developed a know-how, which has enabled it to grow both sales and earnings, in an oil-depressed State, at an enormous rate. I like it.
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