LGIH - What's actually going on!

StelWestrunX · February 6, 2017, 1:31pm

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…

foodles · February 6, 2017, 2:00pm

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.

SenorTurtle · February 6, 2017, 2:07pm

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

MisterFungi · February 6, 2017, 2:14pm

…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.

StelWestrunX · February 6, 2017, 2:20pm

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…

PaulWBryant · February 6, 2017, 2:22pm

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

GauchoRico · February 6, 2017, 2:27pm

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

PaulWBryant · February 6, 2017, 2:36pm

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.

StelWestrunX · February 6, 2017, 2:41pm

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.

CM001 · February 6, 2017, 2:42pm

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.

MisterFungi · February 6, 2017, 2:52pm

Really, they would have to be almost straight up lying if they aren’t seeing very strong sales.

What the company said is: “Although January closings were down year over year, sales are off to a strong start in 2017 and demand for homeownership remains solid. Assuming that general economic conditions, including interest rates and mortgage availability, in the remainder of 2017 are similar to those in the fourth quarter of 2016, we believe we are on track to close more than 4,700 homes this year.”

I’m not willing to assume that. I could well be wrong. That’s what makes a market.

fireblade909 · February 6, 2017, 3:29pm

Mister Fungi (love the name & the pizza by the way)

I don’t think that a 0.25% hike in interest rates (or 2) does not make for very dissimilar general economic conditions

tobapeg · February 6, 2017, 3:46pm

When the guidance for 4700 closings was initially announced, I posed the question-“doesn’t the number seem a little light”. Comments were that to the effect that the company is being conservative and will be looking to beat guidance. Do people still believe this after the slow start? I must admit my confidence is wavering with the slowing closings and possible rising interest rates.
Scott

SaulR80683 · February 6, 2017, 7:21pm

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…

Hey guys, I’ve always said that
A: I make plenty of mistakes, and
B: Don’t buy anything on the basis of what I do. I’m not an advisor and you have to make your own decisions. In this case I was clear that I was just telling you what I did, and why. You are all welcome to disagree if you wish.

Here’s what I was seeing:

Here’s what Revenue looks like (in millions):

As you see revenue more than quadrupled in three years. It looks like it will be about $830 million in 2016 (up 32%).

Here’s what EPS looks like:

As you see they more than sextupled in three years. It looks like it will be about $3.30 to $3.50 in 2016 (up 32% to 40%).

Here’s what Cash Flow per share looks like (in dollars per share):

Their number of closings have been:


2012		1062
2013		1617
2014		2356
2015		3404
2016            4163

They more than tripled in three years. And quadrupled in four.

Their average price per closing is also rising rapidly as they expand:


2012		$135,000
2013		$149,000
2014		$163,000
2015		$185,000

And will be over $200,000 in 2016.

Average gross margins have been very stable:


2012		28.0%
2013		27.3%
2014		28.2%
2015		27.8%

Now here’s the good part:
Their current P/S ratio is about 0.7 (!)
Their current P/E ratio is 8.8 (!)

Now some of you want me to believe that the smart young guys who accomplished all this have suddenly lost their touch completely, and their business is collapsing, because of one low month of closings. Or because of a quarter point rise from almost zero interest rates. You’ve got to be kidding. Sorry, but I just don’t believe it. Especially when they tell me that sales were strong in January, the GDP is growing like mad, employment is good, wages are finally rising, etc etc. Nope, I don’t believe it. But that’s just me!

Saul

PaulWBryant · February 6, 2017, 7:36pm

Saul, have you invested in a home builder before? Just wondering what’s worth knowing about the cyclicality. I imagine if the housing market did slow down, LGIH would be hit hard. I don’t see that happening now or anything…just wondering if that can happen quickly and unpredictably.

Bear

SaulR80683 · February 6, 2017, 7:51pm

Saul, have you invested in a home builder before? Just wondering what’s worth knowing about the cyclicality. I imagine if the housing market did slow down, LGIH would be hit hard. I don’t see that happening now or anything…just wondering if that can happen quickly and unpredictably.

The truth is Bear that I really don’t know, but I agree with you, I don’t see it happening now, but probably any huge uncertainty (like the election, for instance) can reduce housing purchases, but we seemed to have weathered that as Management says sales were strong in January. We’ll have to see. A PE of 8.8 does seem to provide some cushion though, but who knows, maybe the bottom could drop out totally. But in that scenario, probably whatever we invested in would be way down.

SaulR80683 · February 6, 2017, 8:04pm

By the way, as you can see at a glance from Gaucho Chris’ list of monthly closings, they can be up just 10% one month and 75% two months later, on more than one occasion. In other words, they vary.

Happyhunting · February 6, 2017, 10:03pm

Thanks Saul, I always look forward to reading your point of view.

Wish you and us all a prosperous 2017.

Kindest Regards,
Steve

brittlerock · February 7, 2017, 2:08am

there seems to be some randomness at work here and these are different markets and different geographic areas.

Location, location, location, location, location, and location . . . All real estate market performance is dependent on location, ranging from 1) region, 2) to metro area, 3) to proximity to major city, 4) to proximity to schools, transportation, shopping, entertainment venues, etc. to 5) neighborhood, to 6) specific lot site.

It is my considered opinion that LGI Homes understands this very well. They are in a sweet spot of their growth cycle such that they can be very discriminating about where they site the communities they build. They don’t have to build (in fact, probably not able to build) so many houses just to maintain their market presence that they’re forced into buying property in inferior locations.

Interest rates are relevant, but not as important as most people think. Counter-intuitively, the first time buyer’s market is probably less sensitive then the trade up market. Here’s why I say so.
First, let’s be real, a quarter point increase in rates won’t disqualify anybody but the most borderline qualifiers in the first place. It’s my experience (I’ve sold real estate in the distant past, but I don’t imagine this has changed much) that most people do not buy at the ragged edge of where they qualify, they almost always want to leave a cushion. If I’m not mistaken (check me on this) the Fed said due to the large degree of uncertainty in the current environment that they are most likely to hold steady or increase very slowly. Next, for those folks who really do get knocked out of the market due to a small increase there is an equal or greater number of buyers who were looking at a higher price category that will now be pushed down into the range where LGI sells. Net change in market size: 0+. Once a renter has made the emotional commitment to become an owner, the interest rate per se is irrelevant. Down and monthly are the primary financial considerations. There is no indication that mortgages are drying up, in fact just the opposite from what I’ve read. Banks are brimming with cash and competing vigorously to place loans. Also, because LGI has such a short closing cycle, they don’t have to worry very much about losing closings on completed sales due to a rise in interest rates. Most, if not all of their sales close within the rate lock period. (do they release sales figures? I’ve not done the research, but one could check how many sales fail to close, my guess is it’s a small percentage. And there are many reasons other than rate increase for a sale to fail to close).

The one thing that might be a downside for them is skilled labor. But again, I don’t think they are big enough for it to seriously impair their ability to build homes. Of course, there are a host of things that can impact them like weather, war, revolution, and so forth, but if those unpredictables are part of your investing considerations maybe you’re better off burying cash in a mason jar in some secret location.

They’ve other advantages that have been covered over and over on this board, so I won’t rehash them here - if you’re unfamiliar with the discussions, go back and read LGI threads over the last year or so.

BR
Long LGIH

Oforfive · February 7, 2017, 10:35am

One thing that we don’t know is actually going on is to what extent the January closings reflect lower sales contracts and to what extent they reflect cancellations. The sales-to-closing process is as follows: The prospective buyer signs a standard contract and pays a deposit, typically $1,000. Within two weeks the buyer supplies documentation showing qualification to obtain a mortgage. Up to that time, the buyer can cancel the contract and recover the deposit. After the 14 days, the sale is included in the backlog of new (gross) orders. Closing occurs normally with in 1 to 2 months after inclusion in the backlog. LGIH reports backlog and also reports the cancellation percentage. This percentage seems very high to me: 23.5, 31.3 and 27.2% at fiscal year ends 2013, 2014, 2015. I didn’t look at a quarterly to see if this information is included therein. Given the variation in previous annual reports, the effect of any higher cancellation levels in fourth quarter might be lost in the “noise” of Q’s 1 to 3. I would rather see fewer contracts than see higher cancellations.

In any case, we will have February closings before the Q4/annual report comes out. And we had better see 250-plus closings and if not it won’t matter whether it is contract signings or cancellations that are the culprits.

KC, long LGIH