I must admit I have ambivalent feelings about this, but I have decided to wait at least until tomorrow and the December report and conference call. Here are my thoughts:
LGIH has almost sextupled revenue, and octupled earnings per share, in four years. It’s hard for me to believe that the smart guys who did this have suddenly forgotten how to run their business in the last quarter. Granted, growing equally fast off a much larger base is probably impossible, but they don’t have to grow equally fast - their PE is just 9 something, so 15% or 20% growth would probably give plenty of stock rise.
On the other hand, I was fooled by Skechers, which had been growing rapidly for several years, but then stopped abruptly. But they are in apparel, which has fads. And they were affected by a bunch of other companies going bankrupt and flooding the market with “Final Sale” merchandise. And they took on huge expenses with showcase stores in Times Square, etc. I don’t see the same thing at all with LGIH. They seem very sensible.
Jan and Feb closings (of sales made in November and December) are ALWAYS much lower than any other month. In fact the rest of the year the closings averaged OVER 50% higher:
In 2014, Jan and Feb closings averaged 138, while the rest of the year they averaged 208.
In 2015, Jan and Feb closings averaged 187, while the rest of the year they averaged 303.
In 2016, Jan and Feb closings averaged 239, while the rest of the year they averaged 369.
This year November and December sales were hampered further by the uncertainty surrounding the election.
Every source I’ve seen says that there is no problem selling new homes, there is tremendous demand. The only problem is that companies are selling out too fast and can’t build them fast enough. Since LGIH had record closing in December (October sales), perhaps they had some of that problem.
They keep saying that sales are strong.
They also keep saying they expect OVER 4700 sales in 2017. Lets give them all of 1% over 4700 at 4750. That would mean closings up 14% and, with a 6% rise in average price (it’s up almost 10% this year), revenue up 21%, and earnings up probably 25%. And just think if they beat their estimate by all of 2%!
I should point out that near the end of last year they said they were one site short in Houston because they had sold out one development much faster than expected, so fast that they didn’t have the one to replace it quite ready yet. That, to me, is a good kind of problem to have.
If I am understanding correctly, though, you will still need to wait many months to see whether the monthly sales in 2017 do pick up, whether by 50% or some other percentage, correct?
Also, you indicated that you are going to wait until at least tomorrow’s earnings announcement and conference call. If, as you note, November and December sales were further hampered by the election, aren’t you taking a risk that the earnings announcement will not be good and the share price will plummet? I know none of us has a crystal ball, but I am just trying to understand your risk versus reward assessment as it pertains to waiting at least until tomorrow’s earnings announcement and conference call.
I like this point you made, Saul, an interesting, valid way of looking at the numbers.
3. Jan and Feb closings (of sales made in November and December) are ALWAYS much lower than any other month. In fact the rest of the year the closings averaged OVER 50% higher: In 2014, Jan and Feb closings averaged 138, while the rest of the year they averaged 208. In 2015, Jan and Feb closings averaged 187, while the rest of the year they averaged 303. In 2016, Jan and Feb closings averaged 239, while the rest of the year they averaged 369.
But what you left off was the 2017 numbers.
In 2017, Jan and Feb closings averaged 198.
If we assume the rest of the year will be up 50%, that would only average 297 for the remaining 10 months. This would be a total of 3366 closings for the year. This isn’t what I’m predicting the number will be, just what it comes out to be extrapolating your train of thought on the above point (I’m sure you realized this). And for them to hit the 4700 number, as I pointed out in an earlier post, they will need to average 430 homes for the remaining 10 months, so an increase of 117% from their Jan/Feb average.
So the biggest problem I see here is that this year’s numbers for Jan/Feb are 17% BELOW the 2016 numbers. Now you do mention that Nov/Dec had the extra uncertainty of the election which could be the cause of the extra low numbers this year. And the fact that they maybe just haven’t been able to build the houses fast enough.
I’m not trying to make a bear case for LGIH, I’ve still got a decent sized position myself and am holding till the release to hear what management has to say because everything seems to be good, except for those Jan/Feb 2017 closing numbers.
Well, I may have answered my own question: I just reviewed the press release from early January that announced all-time records for closings in a single month (Dec. 2016), and quarterly closings (4th quarter of 2016). So it seems that, the issue of guidance for 2017 aside, tomorrow morning’s news regarding earnings has a very good chance of being rewarding.
If I am understanding correctly, though, you will still need to wait many months to see whether the monthly sales in 2017 do pick up, whether by 50% or some other percentage, correct?
Also, you indicated that you are going to wait until at least tomorrow’s earnings announcement and conference call. If, as you note, November and December sales were further hampered by the election, aren’t you taking a risk that the earnings announcement will not be good and the share price will plummet? I know none of us has a crystal ball, but I am just trying to understand your risk versus reward assessment as it pertains to waiting at least until tomorrow’s earnings announcement and conference call.
Hi Speedy,
I should only have to wait one or two months - for March’s closings (which should be good as the CEO said Jan sales were very strong), and maybe for April’s closings.
As far as tomorrows earnings announcement, I know it will be good as it will describe a record quarter for closings, and those closings will be at a record high average closing price. Meaning it will be a record for revenue, of course, and probably for profits. I expect the conference call will be good too.
…tomorrow morning’s news regarding earnings has a very good chance of being rewarding.
I agree, there is no doubt the release will be good for the 4Q16, but I don’t think the stock’s going to move on that as you point out, a lot of that data has already been released.
The stock is going to move on any discussion and guidance going forward for 2017, and whether that 4700 number gets revised at all.
And for them to hit the 4700 number, as I pointed out in an earlier post, they will need to average 430 homes for the remaining 10 months, so an increase of 117% from their Jan/Feb average. So the biggest problem I see here is that this year’s numbers for Jan/Feb are 17% BELOW the 2016 numbers. Now you do mention that Nov/Dec had the extra uncertainty of the election which could be the cause of the extra low numbers this year. And the fact that they maybe just haven’t been able to build the houses fast enough.
I’m not trying to make a bear case for LGIH, I’ve still got a decent sized position myself and am holding till the release to hear what management has to say because everything seems to be good, except for those Jan/Feb 2017 closing numbers.
Maybe the weak Nov and Dec sales (Jan and Feb closings) are why they are predicting closings for the year of only 4700 (up just 12.9%, instead of the much larger percent increases of the last couple of years).
Foodles, You make it sound like hitting 430 average for the last 10 months is some insurmountable barrier. It’s only up 16.5% from the 369 they averaged for those 10 months last year. Last year those 10 months grew 21.8%, for instance, from the year before. They have a lot more selling communities than they had a year ago. Where is the big barrier. It’s just a question of how fast they can open communities and build the houses. After tomorrows announcement they’ll have a trailing PE of about 8.7, and a forward PE of about 7 (unless they reduce their estimates). I don’t see the risk in waiting. But I’ve been wrong before.
Foodles, You make it sound like hitting 430 average for the last 10 months is some insurmountable barrier. It’s only up 16.5% from the 369 they averaged for those 10 months last year.
Good point, Saul, appreciate your thoughts. I hope you’re right!
Jan and Feb closings are ALWAYS much lower than any other month.
Granted. If I may, I would encourage you to see Jan and Feb closing as a % of yearly closings and see how 2017 closings compare to the projected 4700, 4500, 4250 number looks. My gut feeling is the current Jan and Feb closing might be forecasting yearly numbers between 4250 to 4500.
Also, see how the community absorption rate looked for prior Jan, Feb closings vs current active closings.
I agree that 2016 results are pretty much priced in by now. They reaffirmed today that FY17 closing should be 4700+. What’s the chance of changing 4700+ guidance tomorrow? If they do that, that’s a big NO for me but I don’t think it’s likely. Therefore, I don’t see much downside going into earning.
I drove out to see one of the newer LGI communities yesterday afternoon. LGI touts it as being in Phoenix, and close to all that Phoenix has to offer, including professional sports, entertainment, etc. Turns out the community is way west of Phoenix, and not exactly a great location for getting to Phoenix on a regular basis. It is basically out in the middle of nowhere, with nothing around it other than a few pockets of tiny neighborhoods that, frankly, look poverty-stricken. I saw only one or 2 schools out there, and nowhere to buy groceries…unless buying them at gas stations counts.
At the same time, there were at least 5 other “new” communities in the area…all advertising new houses either in the $180k range or in the low $200k range, i.e.- similar to LGI. I drove by some of these communities and the houses look decent (I know nothing about quality of their construction) but, again, out in the middle of nowhere. I never did find the LGI community, but I know I was in the general area. (I couldn’t get good directions because apparently they won’t give them to you without speaking to you and setting up an appointment, and I had neither the time nor the inclination to subject myself to a sales pitch).
In any event, 2 things struck me: 1, I could not imagine living out there in the middle of the desert with a few scraps of farmland around and virtually nowhere to buy groceries, eat out, let alone buy clothes or whatever, no matter how affordable the homes are, and 2, the amount of competition out there (which does seem ironic given my negative impressions of the location). I am reasonably confident all these homebuilders did their research before buying the land and building out there, but it left a really bad taste in my mouth. It might come down to differences in the house prices or construction or whatever, but it just doesn’t seem likely to me that all of those communities are going to sell all of those new houses anytime soon. Of course, I could be wrong, and for the sake of all of us who own shares of LGI, I sure hope I am wrong.
I think he may have been referring to the one out towards Buckeye…
The Maricopa one is easy to find, and (I think) is almost sold out. I gave a report on the Maricopa one back in September or so. Maricopa was a ghost town around 2008-2009 but now lots of folks commute to Phoenix from there. I drive through there on the way to CA, and the traffic is crazy around rush hour.
The one out towards Buckeye really is in the middle of nowhere.
I’m sorry you had difficulty finding LGIH in Maricopa. The addess I see for that is 38023 W Vera Cruz Dr, Maricopa, AZ 85138.
That is a different community than the one I was talking about. As you noted, the one you mention is in Maricopa, AZ. The one I was talking about is not in Maricopa, AZ. There actually are several in the vicinity of Phoenix.
I own businesses in Phoenix, Scottsdale and negotiating a location in Tempe currently.
The growth in Phoenix is really east of Phoenix. Tempe is red hot, Gilbert has been a boom. Town, and now Mesa is the next frontier for growth. West of Phoenix has always been a bit more of a gamble. Buckeye is not a place I ever hear any of the top restaurant groups talking about as an up and coming community.
I opened my first place in Phoenix at the bottom, 2009. Phoenix was devastated by the recession, and the worst hit areas by far were the communities they built outside the city limits, especially out west of the city. Entire newly constructed communities we empty. Most new homes foreclosed on. My business partner let go of two homes out there in 2010, both bought in 2006 for over 250k. When they appraised for under 60k in 2009 he finally walked away. Coincidently his father started buying once foreclosed, now bank owned investment properties out there in 2011 for around 60 to 80k, just as the market bottomed.
It will be interesting to see how this next year plays out in the housing market.
Also, see how the community absorption rate looked for prior Jan, Feb closings vs current active closings.
Actually, the January and February absorption rates are pretty much… awful. However, I am not too concerned. The previous four years had rates of 4.7, 5.1, 4.4, 4.4. This year: 3.0
Having said that, absorption rates varied significantly, from about 3.3 to 8.6 until January came in at 2.6. The longer trend of TTM average has been from 6.9 down to today’s 5.8 but in mid-2015 it was 5.7. January and February are typically low. In 2014 and 2015, the low months were January and November. In 2013 and 2016 the lows were January and February.
We need to remember that the number of communities has increased from 15 to 65 so one would think that local and regional factors would tend to cause less variation in absorption rates than in 2013 or 2014. I am guessing that the national election did have a dampening affect on buying interest. Election preoccupation and post-election shock may have kept potential buyers occupied elsewhere. BTW, I did not receive a response from investor relations with regard to whether low closings were affected more by fewer contracts or by lower mortgage qualifications (didn’t expect an answer but thought I would get a response of some kind).
So, absorption rate of 3.0 for Jan/Feb is historically significant. I don’t think the business model has changed overnight. I would not be surprised if annual sales came in at 4100. That would be a 5.7 absorption rate for 10 months plus the 396 YTD (65 communities but, they should add up to 5 more during the year). A 6.5 rate would end up at 4,621. But the trailing 12 month absorption rate during 2016 was stubbornly at 6.0 and 6.1. That rate for 10 more months would result in 4,361 closings for the year. 5% increase. The rose colored glasses view is that this would cut the increase in inventory and give positive CFFO and improve the debt/equity situation. Anyone buy that?
KC (who missed the fat pitch last night. Fumbled the buy when LGIH was down 8%)
