Let’s take a closer look at LGIH’s business. Recently Saul posted the company’s revenue and earnings growth over the past 4 years. The numbers seem impressive but they are not without risks. Specifically, we should pay attention to the cash, the debt, the inventory and the share count.
Date EPS Sales TTM EPS Unit Sales Avg Price Inventory ($M) Cash ($M) Debt ($M) Shares out
12/13 0.34 $80.9 505 $152 $142 $54 $36 20.834
3/14 0.22 $75.9 485 $157 $178 $26 $49 20.863
6/14 0.43 $106.4 662 $161 $221 $43 $94 20.869
9/14 0.34 $92.5 $1.33 557 $166 $292 $46 $160 20.882
12/14 0.34 $108.4 $1.33 652 $166 $368 $31 $216 22.136
3/15 0.33 $120.7 $1.44 671 $180 $387 $39 $230 23.809
6/15 0.66 $158.8 $1.67 853 $186 $407 $50 $240 21.246
9/15 0.76 $174.0 $2.09 934 $186 $461 $37 $248 20.319
12/15 0.75 $176.8 $2.50 946 $187 $531 $38 $305
3/16 0.57 $162.5 $2.74 844 $192 $561 $48 $323 20.461
6/16 0.96 $222.7 $3.04 1128 $197 $610 $50 $334 21.487
9/16 0.86 $216.3 $3.14 1052 $206 $677 $46 $355 22.674
12/16 1.01 $236.8 $3.25 1139 $208 $718 $50 $401 22.879
Now in looking at the above data, you will see great growth in EPS, revenue, and homes sold. You will also see that they cash balance is really moving, the inventory and the debt are ballooning. The share count is slowly going up. So what is happening is that the company is taking out more and more debt to finance the purchase of more and more inventory. Let’s look at the inventory in closer detail.
Date TOTAL Inv Land/lots Sales Offices WIP Homes
12/13 $142 $82 $4 $28 $28
3/14 $178 $101 $4 $41 $30
6/14 $221 $126 $7 $45 $42
9/14 $292 $191 $8 $34 $59
12/14 $368 $245 $7 $56 $60
3/15 $387 $267 $13 $58 $48
6/15 $407 $263 $9 $96 $40
9/15 $461 $282 $8 $112 $59
12/15 $531 $320 $8 $109 $93
3/16 $561 $337 $10 $123 $92
6/16 $610 $381 $10 $139 $80
9/16 $677 $425 $11 $146 $95
12/16 $718 $477 $14 $95 $132
The sales offices are considered inventory by the Company; they are growing slowly as LGIH increases the number of Active Selling Communities. WIP (homes being built) and Homes are going in line with the business growth. These two inventory items are less of a risk because they can be cleared fairly quickly. The land and lots are inventory that will take more time to clear; this is the item that is ballooning. Essentially what is happening is the company is using all (most) of it’s revenue plus additional debt to finance the purchase of land and lots. Specifically, from the Dec 13 period through the Dec 16 period the company increased (net) its lots and land inventory by about $400M and increased its debt by about $375M.
Here is the latest (as of 12/31/2017) information on what the debt is:
$322.3M under their $375M revolving credit facility maturing on 5/27/2019. Interest rate (paid monthly) is LIBOR + 3.50%. The company has been increasing its credit facility frequently. One 12/31/16 LIBOR was 0.72% while today it is 0.93%.
AND
$78.2M under a 4.25% convertible note due on 11/15/2019. Interest is paid semi-annually.
So while the sales and earnings have been growing fast, the debt is growing at a similar rate. This method of growth adds a number of risks including interest rate risk, inventory holding risks (and cost), market risk (should home sales slow they could be stuck with), financing risk (should LGIH not be able to continue issuing ever increasing debt), land/lot price declines.
When you compare LGIH’s earnings to other rapidly growing companies’ earnings, they are not apples to apples. Take Shopify for example. SHOP is not showing much in earnings while LGIH is. But the difference is that SHOP’s cash balance is soaring while LGIH’s debt balance is soaring. Both companies are investing in future earnings (LGIH by buying land/lots and SHOP by improving its offering to customers and “buying” and ever increasing customer base.