LGIH today

I’m just sitting on my hands. Short term, the August closings will be down as they will likely lose four or five days of closings. People not going to the title company to sign documents. But there is time to make up for that in September so the quarter ought not be affected.

Unless.

Unless one or more communities were flooded. Even if this is a 100-year occurrence, it is this year’s occurrence. Could permanently reduce the value of the houses in progress and the land. I can only hope that with the long experience in the Houston area that they have avoided land with poor drainage. I spent time this morning trying to locate some of the Houston area communities, particularly Baytown, Baurer Landing and Seacrest. No real luck. I have a message in to investor relations hoping for a press release regarding any flooding. No response, no release although it is only 9 a.m. in Houston.

Down 5%. Not enough for me to add on just the assumption that LGI Homes has detailed knowledge of Houston drainage and flooding.

Fourth quarter will take the brunt of lower sales (availability of homes) and marginally higher costs. I think.

For me, today, LGIH cancels KITE…

KC

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I’ve decided to sell some LGIH as it was in need of rebalancing anyway.

I fully expect the stock will take a hit over the next 6 - 9 months.

We experienced a hurricane last year in SC and while no loss of life, there was quite a bit of property damage including some flooding. The economic effect on local merchants was quite drawn out (we’re just now getting back to seasonal sales average).

An interesting site to look at to evaluate the flooding around houston is http://www.harriscountyfemt.org/#

From an LGIH perspective it looks like Joseph’s Cove and Seacrest might be in the 100 year flood plain.

I fully expect to opportunistically add back to my position.

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Here’s how I’m thinking about it.

Remember that this is not New Orleans, which is actually below sea level and below the level of the Mississippi and just protected by dikes, which broke. Houston is further inland (as I remember) and San Antonio is way inland in dry country, Austin too, and Dallas Fort Worth is way, WAY, inland and West Texas is even further. They’ll just get some rain. The little towns on the barrier islands that got wiped out don’t have any LGIH developments, as far as I know. My guess is that we are talking of something relatively short term here. But that’s just my guess.

Houston is 17% of LGIH’s annual revenue, but if they don’t sell a single house in Houston in a month, that month would represent just one-twelveth of that 17% of the year’s sales, so they’d lose about 1.4% of their total year’s sales. (Remember though that all of their developments are in the suburbs, not downtown where the most flooding is.)

I’d guess, more realistically they’ll lose 85% of sales in the next 30 days, 50% in the month afterwards , and 15% in the third month, which would come to one and a half months’ sales in Houston, or about 2% of the year’s total sales. As Houston is one of their lowest home price areas, that would probably increase the average home sold price slightly. But figure they will lose 2.0% of the year’s sales, assuming conservatively that there’s no catch-up afterwards. …And just to be more conservative let’s raise the lost sales by 25%, to 2.5% of the year’s sales. Not a catastrophe for the company. Remember that we expected LGIH to beat annual revenue estimates by way more than that 2.5%.

To put it in perspective, if I’m really underestimating, and they lose 80% of their Houston sales for the entire next three months, it comes to a loss of all of 3.4% of annual sales, nation-wide. Does that sound like a lot. Here’s a clue: LGIH’s revenue was up 45% last quarter over the year before. And Houston is constantly decreasing its percent of total sales anyway as they open more and more communities around the country.

There’s no change to the company, or its future, just diminished sales short term, like this Jan and Feb, and undoubtedly some increased expenses for repairs of an occasional house under construction. But that’s just how I look at it.

You can’t figure LGIH to be worth 17% less than it was yesterday unless you figure that LGIH has lost 17% of its sales for good! Unless you assume that all of Houston is gone forever! If the price falls to down 10% or 15% on the day, that would seem to me to be a real bargain price!

Saul

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By the way, at the current price of $42.30, the PE is 11.2. That gives you a pretty good cushion on a company that was growing revenue AND earnings per share at 45% each last quarter.

At that price of $42.30, LGIH is ] down 3.4%, which was also the top figure that I came up with.

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SaulR80683: By the way, at the current price of $42.30, the PE is 11.2. That gives you a pretty good cushion on a company that was growing revenue AND earnings per share at 45% each last quarter.

This is part of why I love being invested in LGIH. The general skepticism keeps the price low enough that bad events (like this hurricane) have a very reasonable impact on the price. In comparison to my high growth tech companies that tend to radically overreact to anything negative.

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Not to belabor this, but for those who worried that Harvey was going to knock out all of LGIH’s communities in the state of Texas, a quick glance of San Antonio weather shows right now it’s partly cloudy, partly sunny right now, 78 degrees, and zero precipitation, Austin shows cloudy, 75 degrees, chance of precipitation 3%, in Dallas it’s 80, partly cloudy and partly sunny like San Antonio, with chance of precipitation at 15%.

I am in Houston. I agree the selloff is probably overdone, but a couple of things to keep in mind. This is not a 100 year storm. It is being reported as a 500 year storm and some have mentioned it is well beyond that. All the neighborhoods that usually flood, have flooded. Many neighborhoods that never flood, have flooded. My neighborhood had drainage reworked just a few years ago. The houses are not flooding, but the streets are impassible, which brings me to my second point. It will probably take awhile for investor relations to reply: no one can get to work. I have power and I am working from home.

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Thanks for the first-hand report. Stories like yours and the pictures I’m seeing are mind blowing.

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It’s been awhile since I’ve checked, but before I bought shares of LGIH, I did a search for LGI Homes in Google Earth and they came back with markers for most (all? I don’t remember now) of their subdivisions. Obviously the screens aren’t in real time to catch the hurricane, but it’s possible with most to get an idea of the elevation of the areas in relation to their surroundings.

What, me worry?

-Alfred E Nueman

LGIH has had three on going business problems and a risk.

  1. Lack of labor. This will get much worse.

  2. Lack of affordable materials. Forget about it ain’t happening.

  3. Lack of lots. This isnt a problem.

The risk is that they have a lot of leverage, with a quick problem this month and on going head winds due to scarce materials and labor. I wanted out.

I sold around 8:45 before it dropped a lot. But, the post didn’t go out. (Busy day at work)

I am pretty proud, not because I got out before the drop, becuase for once I had a feeling and acted on it, no excuses.

Cheers
Qazulight

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Saul,

I agree with all you’ve written. They have 14 communities in Houston including Crystal Lake which opens (or would have opened) in early September. I was concerned that one or two communities could be under water which would pretty much make them a write off. Still 1/40th isn’t a game breaker. My model and price target was “for perfection” so making calculations whether the upside from here is worth adding to my top holding. I sent another email, this time directly to the IR gentleman who responded to me last time (asking if he was safe and dry, etc.)

I’m thinking right now that it is worth adding a bit at today’s price. The news I have here is that Harvey is doing a 360 and going to hit Houston a second time.

If this wiped out 4th quarter entirely for Houston, that would be about 4.7% of my optimistic closings target. Don’t think that will happen so there would still be 20% upside from here for 6 months. Of course, hurricane season has just begun and there still is “opportunity” for Florida and Carolina…

KC, hoping for an uneventful typhoon season here.

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it’s possible with most to get an idea of the elevation of the areas in relation to their surroundings.

Jacob’s Landing: 38 ft ASL

Only one I found before I decided it wasn’t worth the effort.

KC

If this wiped out 4th quarter entirely for Houston, that would be about 4.7% of my optimistic closings target. Don’t think that will happen so there would still be 20% upside from here for 6 months. Of course, hurricane season has just begun and there still is “opportunity” for Florida and Carolina…

I think there is another consideration. Management is based in Houston. This is the nerve center for the company. Will their ability to work and execute the business plan be at all affected? Will they be able to get to work? Will executives have to deal with more personal things in their life? Kids out of school. House damaged? Family members in trouble? Will the management team temporarily relocate or will they all work from home?

Chris

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I own some LGIH and live in Houston. I’ve been trying to figure out what the storm means for the company, and there is no easy way to determine it.

The storm was bad. Rain gauges in Pearland, just down the highway from me, recorded 57". Officially, I think they are recording the storm as 52", averaging totals from across the region. Whatever. It was a mess. We evacuated our home and moved to higher ground near downtown Houston. Everything is disrupted.

That being said, do not underestimate the resilience of the city or companies here, or our experience with heavy rain, which is very common. Harvey has moved east now and will make landfall in LA. We are on the clean side of the storm, and the rain stopped this afternoon. We even had a sunset - quite nice after not seeing the sun for five days.

Roads were draining quickly this afternoon, and traffic was already noticeably heavier by 7 pm. Rivers are predicted to crest over the next two days, and some are already receding - notably Buffalo Bayou, which is the one through the center of downtown.

There will be costs to LGIH:

  • Some unsold inventory is likely to have been destroyed, and will need to be rebuilt
  • Some unbuilt land may have flooded, and will need flood defenses improved
  • Labor costs will escalate over the next few months, which will be moderated by a considerable flow of labor from other areas
  • Some material costs may increase, although I expect this to be minor and temporary, as we can already see building materials flowing into the city
  • Some sold LGIH units will require builder warranty work for water leaks and other deficiencies uncovered by the storm
  • Someone mentioned there may be business disruption for the headquarters up in the Woodlands (north of the downtown area). Personally, I don’t expect this to be material - maybe a few days for a few people, but see the bit about resilience above. I expect business to be back to normal by Tuesday next week.

All of these are costs are very uncertain, and will require management to provide details at the next quarterly update so we are operating on anything more than guesswork. In the meantime, considering everything, I would expect an impairment on order of $10 - 20 MM. Just a guess, really, but based on what I see around here, and estimates of numbers of units sold and unsold. I think there will be a noticeable, but not critical, hit to this quarter’s earnings.

And next quarter - well, there will be a lot of people looking to buy new houses (may include my family, after we see what the Brazos River crest does to our house), and a lot of insurance and government money helping them do it.

I haven’t sold any LGIH.

Rgds, Brian

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Whenever we have bad hurricanes in South Florida, what are called “gypsy contractors” flood into the areas affected and screw homeowners needing quick fixes.

Blue tarps become the flag flapping on thousands of properties.

Materials and labor go through the holes in the roofs.

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Brian,

Houston and Texas in general went above and beyond when Katrina struck New Orleans. I live in southwest Louisiana and have lived through several Hurricanes. The worst for us was Rita.

And next quarter - well, there will be a lot of people looking to buy new houses (may include my family, after we see what the Brazos River crest does to our house)

My heart and prayers go out to to you, your family and all in Texas impacted by Hurricane Harvey. Due to commitments to my elderly parents I am unable to help out physically but I can and will help out monetarily.

It seams to me we are constantly bombarded by negative, discouraging news. I must say watching some of the everyday hero’s doing what they could to help their fellow man in their time of need gave me hope and made me proud to be an American.

Kindest Regards,
Steve

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Steve,

My heart and prayers go out to to you, your family and all in Texas impacted by Hurricane Harvey. Due to commitments to my elderly parents I am unable to help out physically but I can and will help out monetarily. <<

Thank you so much for your kind thoughts. But really, we are extremely fortunate and blessed. We are out of the house, the kids, and even the dog, are safe. As of today the house was dry; if the levee holds when the river crests, it is likely to remain so. And if not, a house and furnishings are just things that we can replace.

The people who need prayers are those who have really been hit hard - those who lost loved ones, and livelihoods, and for whom their house was all they had. That is not us - here I am with spare time to read the Motley Fool and consider how lucky I am to have cash to invest in KITE, SHOP, and LGIH. As per others on this board, I’ve decided the Red Cross can use much of my KITE proceeds. That was a great idea. And there will be plenty of opportunities to help others in the community, which will be great learning for the kids to help them actually gain real experience with loss and understand how blessed they are. For all the horror of the storm, I have absolutely nothing to personally complain about.

You Louisianans have been magnificent during the storm. On Monday, as we were trying to flee the city, we drove past two separate Cajun Navy boat launch operations in nearby neighborhoods. Guys were out there in rain bucketing down at a couple inches an hour, with winds of 30 knots, pulling people out of danger by the boatload. God bless you all, and I hope Harvey hasn’t been too harsh for you today.

It seams to me we are constantly bombarded by negative, discouraging news. I must say watching some of the everyday hero’s doing what they could to help their fellow man in their time of need gave me hope and made me proud to be an American. <<

Ditto, brother.

Brian

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LGIH upgraded by Wedbush to outperform this am target $49. They say 12% exposure to Houston which will be negative to 2017 but a positive for 2018. Closings could be pushed out to later quarters. They view the recent pullback has more than discounted these factors. LGIH undervalued at these levels. I will be waiting for a pullback into the 30s if it gets there to add. I think when they report closing next time the stock could be hit further and or at next earnings.

Rob

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