LGIH - What's actually going on!

Investment Analysis Clubs Saul’s Investing Discussions
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LGIH announced 172 homes closed in January, compared to 232 home closings in January a year ago.
Although January closings were down year over year, they said that sales are off to a strong start in 2017 and demand for homeownership remains solid. They believe they are still on track to close more than 4,700 homes this year. Now that means averaging over 410 closings per month for the next 11 months. They didn’t reduce their guidance a bit.

So what’s going on? Where is all that optimism coming from, with such a bad January? Here’s the key to understanding it: They had said previously that:

January and February closings will be substantially lower because closings in Jan and Feb are based on sales that were made between November 15 and Jan 15, which includes Thanksgiving, Xmas, and New Years holidays. So historically December is very strong and then January and February are weaker for closings.

That’s crystal-clear, isn’t it? If they SELL a house today, it’s about six weeks for the actual CLOSING!

Now this past year, from Nov 15 to Dec 15, after the elections, the country was in shock. No one was thinking about buying a house. In fact, about half the population were more talking about moving to Canada than about buying new houses, so SALES of houses were really down. But these were the sales that CLOSED in January, so January closings were way down.

But what the company is saying NOW is that although closings in January, of sales from late Nov and early Dec, were way down, SALES in January were REALLY UP, so they are happy with their estimates for closings for the year, in spite of those slow Jan closings, which mean nothing going forward.

I bought as much as I could afford to add near the opening at an average price of $27.57. You can track me and see how well I did.

Saul

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I also added to my slightly overfull position. And I have a limit order in 5% below my today’s purchase price. I have a slight concern, given my overweight holding now, that those younger apartment dwellers might continue to be “in shock” for awhile.

I am overweight HAS, also, so overall today is not, at the moment, quite as bad as it might have been (but not as good as it could have…)

G’night all, nearly midnight.

KC

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fwiw, I was curious about the downgrade - note I do not follow this business

If it matters, homebuilder NVR actually reported an 18% increase in new orders for the Dec quarter, but this was after a disappointing previous quarter so there seems to be some randomness at work here and these are different markets and different geographic areas.

http://phx.corporate-ir.net/phoenix.zhtml?c=78603&p=irol…

Here are the main reasons for the downgrade today:
*they have downgraded twice recently on decelerating growth concerns
*believes that Jan numbers will make 4700 the ‘target’ vs. previous expectations it was the floor
*cited previous stock declines in reaction to closing shortfalls
*believes Jan gets extra attention cause it could reflect impact of a higher mortgage rate environment
*believes this reflects 1) affordability constraints of new buyers and 2) fallout from other buyers no longer qualifying
*thinks the company may be forced to offer incentives which could hurt profitability in response to peers that will sacrifice margin for volume
*does not expect that subsequent months will be as impacted by cancellations as the Backlog is scrubbed given the short Contract-to-Close process
*thinks there is a chance company is experiencing growing pains from its own geographic expansion and lean infrastructure
*WF sees 3.49 now down from 3.78 previous forecast for 2017

Analyst is Stephen East

I’m just listing what he said - have no idea if any of this is valid…

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Hi Saul…

You said “Now this past year, from Nov 15 to Dec 15, after the elections, the country was in shock. No one was thinking about buying a house.”

Is this your opinion or is there evidence that Nov 2016 materially differed from Nov 2015. I don’t know if that conjecture is provable/ascertainable.

What we do know is that year-end consumer shopping patterns in 2016 beat 2015 hands down. That doesn’t sound like defensive spending to me.

What data supports your “shock” premise?

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Thanks for finding that list from the analyst at Wells Mr.OneEye.

I am not adding to my LGIH at present and may reduce.
Briefly the main reason being there will be talk of raising interest rates all year,
and I believe this will put continual pressure on LGI’s stock price regardless of how
well they do.

Plus the large short position in this name.

Gotta run, golf calls.

JT

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to be clear, this is my ‘list’ from his narrative…

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Now this past year, from Nov 15 to Dec 15, after the elections, the country was in shock. No one was thinking about buying a house

When a CEO uses weather as an excuse for sales decline, or an investor using election as an excuse, need to recognize they are excuses.

If the buyers are in shock and not thinking about buying then sales should have gone down, not closing. Closing is actually completing the previous sale. The reason closings often fall through is because the buyer could not get the financing. The interest rates have gone up during that period.

This is fairly young company which enjoyed stellar growth, while you want to give credit for that and want to believe it can continue to grow, investors need to know they can quickly recover from their missteps (Yes it is LGIH missteps and other builders are not reporting such a serious decline).

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Analyst is Stephen East

From Well fargo?

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right, from WF - i mentioned the downgrade today

only putting his name on it cause, in the final analysis, it is just one Bubba’s opinion, and he is clearly looking at the stock on a 6 month basis vs. a long-term holder. Still…interesting none the less.

LGIH is clearly responsive to calls - anybody here could call them and ask for a response/explanation…

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Saul, I respect you a lot. But I would think that the analysts and big money know about the timing of sales and closings. And you’ve provided no evidence from other homebuilders reports that the election impacted the industry. Consider whether you’re falling into the kind of defensive rationalization thinking that we are all prone to. (I’m thinking of Skechers and maybe Skyworks.)

Homebuilders are notoriously cyclical. We are moving into an environment of rising interest rates. Maybe it’s time to move on?

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And you’ve provided no evidence from other homebuilders reports that the election impacted the industry. Consider whether you’re falling into the kind of defensive rationalization thinking that we are all prone to.

you know, if it matters, I wouldn’t make this mistake in thinking that analysts or ‘big money’ know things like this - or that they make good calls. I follow NVR and a quarter ago it got downgraded on eh news and nobody liked it, and then they reported a good quarter and it got upgraded and everybody liked it. But nothing had changed, and as noted earlier, it is clear that sell-side guy at Wells is using a 6 month time horizon on his note. And he is just one Bubba Investor guy - that’s all. That doesn’t mean this or that explanation makes sense or not, but I would never ever assume that “access to information” (which is far more dubious in the world of Reg FD) means superior analysis. Many times it doesn’t. Life doesn’t work that way, and what you often see is explanations created after-the-fact (I’m good at that myself too).

Besides, if you own this stock, call them and ask. They will talk with you. You have to ask good questions, but that part isn’t hard. I wouldn’t buy them without getting their take. Course, you don’t have to do that - somebody here might have a different time horizon and feel this is unnecessary.

Enough from me on this…:slight_smile:

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I have to say, in my couple years of reading this baord, the following is one of the strongest endorsements I’ve heard from Saul.

I bought as much as I could afford…

Not that Saul is always right, just saying that’s a pretty strong statement.

More than a few here are saying that there is no evidence that the slowed sales in Nov/Dec was because of the election fallout. That’s true as far as I know, but to me, that’s not the most important point of Saul’s post.

To me, the following is the most important point.

…they said that sales are off to a strong start in 2017 and demand for homeownership remains solid. They believe they are still on track to close more than 4,700 homes this year. Now that means averaging over 410 closings per month for the next 11 months. They didn’t reduce their guidance a bit.

It comes down to if you believe in management and think that management knows what they’re talking about and with the slow Jan closings, will still be able to hit the more than 4700 homes closing number for 2017 (as Saul pointed out, more than an average of 410 homes per month for the remaining 11 months).

I just recently bought some more LGIH, so I may hold off here, even with today’s discount, as I tend to spread out my purchases more as I move into a stock. Although had I not recently bought at a higher price, I would be adding here.

Does anyone have the number of monthly home closings stats handy for the past 2-3 years without me having to open each release for each month over the past years? Or know someplace where I could find those? I didn’t see such a metric on the LGI Homes website.

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Hello;

In terms of LGIH being responsive to calls. A while back I left voice mails to their Investor Relations and sent e-mails and no one ever got back to me. I am assuming you had a better experience.

Cheers;
SeñorTurtle

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…I would never ever assume that “access to information” (which is far more dubious in the world of Reg FD) means superior analysis.

Just for the record, I’m not assuming that, my friend. In the absence of evidence to the contrary, however, I am willing to assume that an analyst who gets paid a lot to cover the industry knows better than most individual investors how to make good use of available info.

Consensus EPS estimates for LGIH have been coming down for a while now. The short interest is enormous. Maybe shorts will cover now and provide a short-term bump. Maybe not.

Re the political environment, how should one factor in the impact of the new admin’s emphasis on border control? Immigrant labor is important to the homebuilding industry, esp. in a number of LGIH’s key markets. The labor market in construction is already tight.

I have no position in LGIH and have no intention of taking one. I’m just adding my 2 cents to the conversation. If folks have good answers to my concerns, I’m happy to change my mind.

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Investor Relations
Caitlin Stiles, (281) 210-2619
InvestorRelations@LGIHomes.com

If this doesn’t work, call the CFO directly.

Charles Merdian - start with the number listed on the cover sheet of their SEC filings and ask for his office.

Tell them you are Mr. Turtle of Turtle Asset Management.

If need be, you call the main number and report that IR is not being responsive. I’m not suggesting this, but I’ve expressed frustration before when I felt someone was needlessly ignoring me (though don’t try this with Google - they don’t give a cr^d about you, but some very very large companies can be amazingly helpful) but you’ve got to be careful in being both respectful and firm.

Course, all this assumes - of course - one has done homework with specific questions beforehand while showing immediately how much you’ve research the company. And it helps not to call on a day like today…

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It comes down to if you believe in management and think that management knows what they’re talking about and with the slow Jan closings, will still be able to hit the more than 4700 homes closing number for 2017 (as Saul pointed out, more than an average of 410 homes per month for the remaining 11 months).

Well said. Really, they would have to be almost straight up lying if they aren’t seeing very strong sales. I guess we’ll find out in a couple months.

Also, who else are you going to trust? Wells Fargo? Ha. Their own recent indiscretions notwithstanding, they initiated coverage on LGIH on September 29th. 4 months ago. Guess what they said? Outperform! The stock was at $36. They dropped it to market perform in January and now underperform. So helpful, WF. If anyone followed their advice they bought at the all time high and are now being told to sell at the 45ish-week low. Great job, Wells.

Why is LGIH at a 45ish-week low? As Rich Smith awesomely mentions here: https://www.fool.com/investing/2017/02/06/why-lgi-homes-stoc…, it’s all one big ridiculous self-fulfilling prophecy. Wells set a target of 26 - 28 bucks a share. Well here we sit in that range right now. Just preposterous.

I bought a bunch more today, and I see a lot of short term catalysts for appreciation:

  • Bounce back from the big drop today
  • ASP increasing because of higher $ markets…hopefully EPS increasing for the same reason.
  • Big closing months coming up, for example because they couldn’t quite get something closed in January so it rolled to Feb.
  • Increased closings from new markets

I’m sure there are more. But the point is, this is a huge overreaction. Buy low and sell high, my friends. (In other words, don’t ever listen to Wells Fargo.)

Bear

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Does anyone have the number of monthly home closings stats handy for the past 2-3 years without me having to open each release for each month over the past years? Or know someplace where I could find those? I didn’t see such a metric on the LGI Homes website.

Here are the monthly stats:


	2017	2016	2015	2014	      2016-2017	   2015-2016	2014-2015
JAN	172	232	153	119		51.6%	     28.6%
FEB		245	220	156		11.4%	     41.0%
MAR		367	298	210		23.2%	     41.9%
APR		341	267	191		27.7%	     39.8%
MAY		432	255	228		69.4%	     11.8%
JUN		355	331	243		7.3%	     36.2%
JUL		306	311	174		-1.6%	     78.7%
AUG		383	320	183		19.7%	     74.9%
SEP		363	303	200		19.8%	     51.5%
OCT		351	264	241		33.0%	      9.5%
NOV		321	249	165		28.9%	     50.9%
DEC		467	433	246		7.9%	     76.0%
TOTAL	4700	4163	3404	2356	        12.9%	     22.3%	  44.5%

Even if they hit their 2017 guidance of 4700 homes, their growth (# of homes sold) will be down almost by half from the previous year which was down by half from 2014. Home prices have been rising over this 2 year period which is not reflected in the above numbers. Will prices continue to rise in 2017 or will they level off?

Chris

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I bought as much as I could afford to add near the opening at an average price of $27.57. You can track me and see how well I did.

Basically Babe Ruth pointing to center field.

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fwiw, WF is a big place - impugning somebody’s work because of their employer seems a bit of a reach and unfair; besides it is that analyst’s job to see things as he or she sees it, and prior upgrades or downgrades aren’t important; course, as you say the analysis might be idiotic (or fanciful; or short-term, or whatever, but refuting the points seems a lot more appropriate than attacking the messenger)

And blaming the analyst? LGIH reported eh news and then WF downgraded it. LGIH was down before WF downgrading it, and it would have been down without any downgrading - in an hour or two (and it could go up tomorrow - could be more buyers than sellers). Plus, the article uses circular reasoning - he is using analyst EPS estimates to justify his opinion without considering that those estimates are FROM analysts and are likely headed lower.

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ASP increasing because of higher $ markets…hopefully EPS increasing for the same reason.

LGIH can steady the sales but it will cost them margins, I guess that’s the point raised by WFC analyst. I have recently read reports from other sources (who have much stronger batting average for over 10 years) that prices are not going up and start coming down on the coastal.

Remember LGIH has a short order to close window, so it is not like DHI who have a better 6 months visibility. So there is a good chance the management could be blindsided by the sales decline and also some of these declines are happening in new locations for the company.

On the other hand you have a hefty short interest and the multiples are getting lower and providing a much better floor. If they pull the sales next month, this is a great setup for a bounce back to 430 to $32 for a quick 15%.

BTW, I quickly skimmed MTH call and they are also expressing some weakness. So I am waiting on the sidelines.

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