LGIH Texas question

Since Texas’s economy appears to be heavily dependent on oil industry,which is clearly not benefiting from the record low oil prices, how come LGIH continues to fire on all cylinders? Can someone please explain what fuels this company’s growth?

Thanks in advance.

Huddaman,

Long term trends.

I was looking into building a SIP panel factory in 2003. Part of the research was learning about the real estate industry.

I found a couple of interesting things,

  1. A house typically has a 50 year economic life. This is becuase of several factors and it is not a simple thing. But I will try to boil it down.

Neiborhoods cease to viable as built. Either do to changes in technology or changes in the way the economy of the area is functioning. Things that seem to be completely unrelated; like how many miles a car will last, or the falling demand for paper cause changes that make the neighborhood unattractive.

Houses get old, even hoises that are well, maintained, must be updated for new looks and with new technology. Even with complete technical upgrades, old houses do not meet the needs of modern families.

  1. The country is growing. 1 to 2 percent now, but households are still forming.

When you take these two together, we need to build 2 percent of all houses that are standing every year just to breakeven and another 1 percent to keep up. Additionally, we often end up building the wrong houses. From 2000 to 2008 we typically built McMansions. Of course not everybody needs, wants or can afford a McMansion. So after a 8 year hiatus in building we now have a pent up demand. Not only that, we really did not focus on starter homes, as LGIH does, for close to 20 years. This leave really big gap.

When a young family is looking at homes, they can look at 20 year old houses in the same price range as new houses. The trade offs between high maintenance, high utility bills, out of date feature, and nieghborhoods that are about to enter decline make a new home, even a smaller one with a smaller yard and less pretty trees, a good buy.

Finally, while I consider myself very fortunate to have escaped Houston, the city has a very strong economic moat, and the price of the raw materials feeding into the petrochemical industry has very minuscule effect on that economy.

Cheers
Qazulight (I actually think low oil prices are having a bigger impact on Casey’s as they have a lot of thier business in the mid west that supports the Balkin.)

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Qazulight,

But that’s just a good reason behind why we need new homes in this country. Yes there is business case for why we need new homes. But you didn’t make a business case regarding why we need 50% more homes from LGIH every year. Current situation looks extreme, and it begs the question, why is it so, and for how long will it last, and will the reverse be true as well? In other words, will we see the opposite effects (massive negative growth) once the cycle reverses?

http://www.dallasfed.org/research/beige/2016/bb160302.cfm

The above doesn’t sound like Houstan is doing extremely well. Hence it begs the question why is this company really growing sales at a > 50% YoY clip.

While the current PE doesn’t demand any significant growth, it’s still important to understand the reason behind this growth, and whether existing sales (let alone growth) are sustainable.

I think LGIH stock is extremely attractive, and even if we see the tide reverse sometime in the future, it’s still worth getting some shares in the hopes that the current growth continues giving a boost to EPS and hopefully expand the PE as well resulting in some juicy returns.

I see that you made a case why we might need more than the usual number of starter homes. But its not 100% clear that the pent up demand is sufficient to fuel 50%+ growth.

Huddaman

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And I never will. Folks like Saul can it, I can’t. If could I would be riding around in my vintage Beech 18.

Cheers
Qazulight

http://stockcharts.com/h-sc/ui?s=LGIH&p=D&yr=1&m… stagnant going nowhere.

http://stockcharts.com/h-sc/ui?s=KBH&p=D&yr=1&mn… note since Sauls outstanding find on Feb 11,2016.

http://stockcharts.com/h-sc/ui?s=ITB&p=D&yr=1&mn… ditto

JAFOing,

Quillnpenn -

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Oil represents a surprisingly small percentage of the economy for Texas and Houston. Friends in the Odessa area, where you would think would be in a bust because of the decline in fracking, tell me that home real estate is still selling well, and in fact is in short supply. Many of the people involved in oil production are specialists who are transient enough not to buy a home. Even during the boom.
Nevertheless remote real estate investors , direct or through a corporation, have a huge information disadvantage compared to locals. So I won’t be buying any LGIH.

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But its not 100% clear that the pent up demand is sufficient to fuel 50%+ growth.

Hi Huddaman,
Just curious. Why do you need 50% growth when you have a PE of 9…that’s nine!!! Wouldn’t growth of 40% make you happy?

it’s still important to understand the reason behind this growth

That’s an easy one. They have a niche which they are very good at filling. they market to apartment dwellers who live near their developments, and their marketing is focussed on how the apartment dwellers can buy a new home of their own at a cheaper monthly payment than they are paying now in rent (which rental payments go up every year). It’s a no-brainer! And they can grow so fast because they are still quite small and haven’t run into the Law of Big Numbers yet.

Saul

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Mauser96 is correct.

Our family has lived in the center of the oil patch for 40 years…Odessa, Tx.

The economic diversification that I have witnessed over the past 25 years is incredible. Every week I play golf with a foursome that includes 2 lawyers and a college professor. Point being, we have colleges (two) in our town of some 150,000, lawyers, doctors of all specialties, 2 large hospitals, dentists (myself included of 41 years,
many banks and retail stores of all varieties. We have become truly economically diversified.

Point being that when the price of oil goes up and down, as it always has and always will, companies simply tighten their belts and life goes on. Oil will come back strongly as it always has in the past.

Our real estate sales are still healthy and though new home construction has slowed, it continues.

Jim
Long LGIH

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Just curious. Why do you need 50% growth when you have a PE of 9…that’s nine!!! Wouldn’t growth of 40% make you happy?

Agreed, you don’t need 40% growth or even for that matter 5% growth when the PE is in single digits. And I didn’t ask for it. But it’s always important to question why the business is growing at an unusually high pace.

I am not exactly convinced by your answer that they are marketing to renters. That’s always been the case forever with starter homes. What makes it appealing all of a sudden? Their growth rate has skyrated since Q3-2014.

Perhaps this is due to ultra low interest rates? Though interest rates were lower even before Q3-2014. Perhaps it is a combination of low interest rates and record unemployment (4.9% for the US)? Or a few other factors that has all of a sudden caused all the renters who decided to jump on the ownership bandwagon? Perhaps it is the record low home ownership rate as of July-2015 (that should provide a tailwind) http://www.cnbc.com/2015/07/28/home-ownership-rates-drop-to-… Maybe we are reverting to the mean?

In any case, my concern here with LGIH is not what-if the growth slows. That would have been if we were paying 80 PE (e.g. with UA). However, my only concern is, can the unnatural +ve growth rate turn into unnatural -ve growth rate. Anything unnatural gives me pause.

In case of LGIH there is nothing extraordinary that should warrant such high growth. The fear I have is, cyclicality can cause the EPS to shrink just as fast as it has grown. All of a sudden we could be staring at 15 PE and the stock price could plummet.

I remain a happy owner of LGIH though.

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