LGIH: projecting 2018

Conference call questions included several on sustainability of growth. Answer, as I understand it, was: not sustainable as percentage but sustainable in absolute number of additional communities. Growth in Texas is not sustainable. There will be no growth in Texas. Outside of Texas is now 52% (of what…, closings I think). This will increase. With that in mind, absorption rates for Q3 was 13 in Fort Meyers (Fla), 11 in Dallas-FW, 9.8 in Austin, 9.6 in San Antonio and 8.8 in Houston. It would seem that the higher-than-average absorption rates in Texas requires faster land additions just to stay even.

While they spoke confidently of a long runway for growth it seemed to be slow and steady. But there is room. Looking at Minneapolis, Winston-Salem, Oklahoma City and Sacramento… and Las Vegas. Twenty to thirty over a couple of years. Say, two years although it wasn’t clear and also not clear if just those particular markets because he also mentioned adding communities in other markets recently entered such as Portland, and they are already in Minneapolis and Winston-Salem. They add near freeways, so either both sides or if multiple freeways then multiple sides of the market-center. So where they have one or two communities, they can add in some cases. My take on this is that there will be linear expansion, or at best a very small exponential expansion. Therefore I am looking at adding 15 communities in '18 which is 18%, I believe.

They covered a lot in a short call. Gross margins coming down due to the wholesale selling in four markets, can’t find that note but I remember one was Georgia. 50 basis points due to wholesale, 70 basis points due to costs. Costs more due to materials but some due to less efficiency with new labor. Wholesale won’t be a big % of sales for several reasons including the limited availability of houses in most markets. Net margin on those sales doesn’t change due to lower sales expense.

I see three competing trends in 2018. 1. Slower percentage growth in communities. 2. Higher ASP because growth is outside Texas. 3. Tug-of-war between G&A efficiency and labor/material cost increases. I’ll take a WAG at 21% to 24% revenue/eps growth. What multiple will the market assign that kind of growth? $6.12 eps in '18. P/e 13 = $80. Oh, debt/capital improved from 51% last year to 48% currently. That should help the p/e multiple some. Trading at p/e of 13 times $5 forecast for '17 right now.

One of the “things to watch” was quarters inventory. Currently 21.4 quarters, 5.35 years. My spreadsheet for that history seems to be wiped out. :frowning: Lot of work. I’ll search for a backup copy but so far no joy.