Modeling LGIH sales for the rest of 2017

Investment Analysis Clubs Saul’s Investing Discussions
1

In 2016, LGIH sold 4163 homes. They started that year with 54 active selling communities. Here’s how many homes they sold per month. I’ve also put the active selling communities or each month and the homes sold per ASC per month:

2016


Home Sold	Active Selling Communities	Homes Sold Per Active Selling Community	
232	        54	                        4.3
245	        55	                        4.5
367	        56	                        6.6
341	        55	                        6.2
432	        56	                        7.7
355	        56	                        6.3
306	        58	                        5.3
383	        59	                        6.5
363	        59	                        6.2
351	        61	                        5.8
321	        63	                        5.1
467	        63	                        7.4

B>2015


Home Sold	Active Selling Communities	Homes Sold Per Active Selling Community
153	        42	                        3.6
220	        42	                        5.2
298	        44	                        6.8
267	        44	                        6.1
255	        44	                        5.8
331	        45	                        7.4
311	        49	                        6.3
320	        49	                        6.5
303	        50	                        6.1
264	        52	                        5.1
249	        52	                        4.8
433	        52	                        8.3

B>2014


Home Sold	Active Selling Communities	Homes Sold Per Active Selling Community
119	        27	                        4.4
156	        27	                        5.8
210	        28	                        7.5
191	        29	                        6.6
228	        30	                        7.6
243	        31	                        7.8
174	        33	                        5.3
183	        34	                        5.4
200	        34	                        5.9
241	        37	                        6.5
165	        38	                        4.3
246	        39	                        6.3

2016 Average homes sold/mo per ASC: 6.0
2015 Average homes sold/mo per ASC: 6.0
2014 Average homes sold/mo per ASC: 6.1

2016 Average homes sold/mo per ASC (May-Dec): 6.3
2015 Average homes sold/mo per ASC (May-Dec): 6.3
2014 Average homes sold/mo per ASC (May-Dec): 6.1

LGIH currently has 71 Active Selling Communities. If they don’t add any new ones for the rest of 2017 then historically we can expect them to sell 71 times 6.0 more homes per month. This is 3408 more homes and when added to 1126 already sold, we get 4534 homes sold for all of 2017. Maybe this is our low estimate.

However, during the past 2 years, LGIH has added on average 0.8 new Active Selling Communities per month. If we model the addition of 0.8 Active Selling Communities per month and sales of 6.0 homes per Active Selling Community, then we get 3581 more homes and when added to 1126 already sold, we get 4717 homes sold for all of 2017. Maybe this is our midlevel estimate.

If we add seasonality, and increase the number of homes sold per ASC per month (during the May-Dec period) from 6.0 to 6.3, then we get 3760 more homes and when added to 1126 already sold, we get 4886 homes sold for all of 2017. Maybe this is our high estimate.

Will the above happen? No one knows. But management has said they expect to sell at least 4700 homes in 2017 IF conditions remain similar to 2016. I think a big part of the conditions is that interest rates remain low.

Chris

37 Likes
2

BTW, the way I’ve modeled the sales, does not rely on any catch up for the slow 2017 start. For the numbers to work, LGIH only needs to revert to the average homes sold per ASC for the past 2 years.

1 Like
3

Seems to me 5% drop in share price not really warranted.

Not sure I would buy before earnings release, but I definitely won’t be dumping shares.

At least that it how I am looking at it.

Kevin

1 Like
4

Thanks Chris, great analysis in my opinion!

1 Like
5

This is what the CEO said on the last earnings call:

We ended February with 65 active communities and we believe we’ll have between 75 and 80 active selling communities by the end of 2017.

In my mid and high sales model, I modeled adding 0.8 active communities per month taking it from 71 now to 77 by December which is right in the middle of their guidance.

Chris

4 Likes
6

IF conditions remain similar to 2016. I think a big part of the conditions is that interest rates remain low.

In the first 3 months Jan-March, new home sales increased by 15.6% y-o-y. So far it seems the interest rate hike has not impacted other home builders. What a couple of more hikes will do? I don’t know. I hope it should not matter especially if the rate hikes staggered.

If I may, I would request you to model LGIH growth along the industry trend and see where it leads.

1 Like
7

Guys,

LGIH statement: “we believe we are on track to close more than 4,700 homes in 2017” is not in their last monthly home closing report dated May 3rd.

So, it is clear to me that they no longer believe they will close more than 4,700 homes in 2017.

2 Likes
8

Bartolo,

So, it is clear to me that they no longer believe they will close more than 4,700 homes in 2017.

I had a similar viewpoint myself until I read Chris’ post #27411.

After reading that post, I have a pretty good feeling again that they WILL make their 4700 number for homes closed (or at least be right on the doorstop of it if they don’t quite get there).

I’m willing to continue holding at this point and may even consider buying more if they drop any lower.

2 Likes
9

That is well done Chris but lets look at this years numbers and see what they read.


2017
Home sold .         Active selling communities         Homes sold per active selling community
172 .               65 .                               2.64
224                 65                                 3.44
365                 69 .                               5.29
365                 71                                 5.14

So by this time LGIH had already broken over 6 homes sold per active selling community in previous years. But lets assume that they can hit 6 homes sold per asc for the next 8 months. That would but them at 426 homes per month x 8 = 3408+ 1126 for the homes already sold at 4,534. While you think this is the low number, based on this years numbers I think that will be the mid to high number. But who knows I could be wrong maybe they will have a really good summer and sell 8 homes per active selling community. This will be interesting to see though.

Andy
No position in LGIH

6 Likes
10

But management has said they expect to sell at least 4700 homes in 2017 IF conditions remain similar to 2016.

Chris, that was impressive. However…

  1. Management isn’t saying that anymore. At least, they conspicuously left it off the April closings release.

  2. While it’s an interesting phenomena that “Average homes sold/mo per ASC” has come to about 6 each year, there’s no reason to think that will continue. It all depends on how saturated they are in each of the markets. I believe it’s a total fluke, honestly. There’s no mechanism of LGIH’s growth that’s causing it to be 6. It just happened to work out to 6 each year. Randomness that looks like a pattern.

To see variation in your “Average homes sold/mo per ASC” number, simply look at the combined first four months of each year:

2014: 6.1
2015: 5.5
2016: 5.4
2017: 4.2

Sure, they were able to accelerate in 2015 and 2016 to catch up to an average of 6. That doesn’t mean they’ll be able to accelerate even more and catch up this year.

  1. I’ll grant that all that you said COULD happen. The future is unknown. But what seems to me CAN’T happen is a beat in Q1. The market expects 162.5M in revenue. This is possible, but since they had only 761 closings, ASP would have to be over $213,500. It was only 208k in Dec, 205k in Sep. 213.5k would be a big jump, though still very possible.

The real problem is EPS. The market expects 51 cents, per Yahoo, which is almost as much as they had in Q1 2016, 57 cents. In that quarter Operating Profit was 17M, and I don’t see how they can get there. Even assuming they hit revenue, their 26% or 27% gross margin will only translate to about 42M - 44M in gross profit. Subtract out a little over 30M for expenses, and I don’t see how they get anywhere close to 17M. Plus they have more shares outstanding than they did in Q1 2016. 51 cents just doesn’t seem possible…I’d guess around 30 to 40 cents, but I wouldn’t be surprised if it’s less.

I guess if ASP jumped to $220k or something, they might possibly beat on revenue and hit EPS. But I just can’t see that.

Then we still have to worry about what they say for guidance and if that missing reiteration of the 4700 meant something. If they reiterate it on the call, then we have to worry about whether the market believes them.

My conclusion: unclear on the long term, but bearish on the ultra short term (ie, next week)

Even if you believe in LGIH and want to own it, I think it’s worth considering waiting or at least only taking a half position now and seeing what happens Tuesday. If I’m right and they miss, you may get a significantly better price.

Bear

3 Likes
11

Bear,

Their Q1 2017 home sales are locked in already. It’s a known quantity and the market already knows that.

To clarify, the 6 homes per month per ASC would need to be achieved in the May-Dec months of 2017 (not the average of for all of 2017) to hit the numbers in my model. My main points are that 1) there is no catching up needed for LGIH to hit their guidance goal of 4700 homes for all of 2017 as long as they hit 6 homes per month per ASC and they grow the number of communities as projected, 2) it’s not going to be as difficult to hit there guidance because they are adding more selling communities. If they manage to sell only 4-5 houses/month per ASC for the balance of 2017 then there are probably bigger problems.

Management not reiterating the 4700 closings for 2017 doesn’t necessarily mean that they are backing off of that number. We will probably find out next week when they have their earnings call.

Yes, real estate markets are always local and it is by no means a given that they will continue to sell 6 homes per ASC as they have done previously. In fact, they have a bunch of new selling communities and the dynamics in each market may be unique. With that said, 1) home ownership percentages in the United States are still well below the peak, 2) economic recovery is still on track, 3) interest rates are still near 40 year lows, 4) rental prices have been rising. IMO, these factors make it likely that home ownership should continue for several more years. Is LGIH the right horse to bet on? Maybe maybe not. As I said previously, I sold half of my LGIH shares last month; the stock price is now below my sale price and I am considering adding back some shares; the question is should I add before earnings or after the results are out. I find it hard to believe that LGIH management would build homes that they cannot sell. Nevertheless, I think is prudent to wait for the earnings call (and maybe the May sales numbers) before repurchasing the shares that were sold last month.

Chris

4 Likes
12

I’m not sure why anyone should expect that they will continue to have (or need) 6.1 closings per community. You guys are losing track of their expansion. For example, in Texas they were selling homes at $165,000 or something like that, and selling high numbers. In Seattle they are selling them at $375,000, and presumably one closing will not only bring more than double the revenue but probably triple the profit. But there’s no way they will sell six $375,000 houses per community. Those communities will probably be happy with selling three. And they are building higher price communities even in the Houston area, according to a recent press release. Here’s a link to the website: http://www.lgihomes.com/community.cfm?id=magnoliareserve

I may be completely wrong, but I think fixating on number of closings instead of thinking about total revenue coming in, and about earnings, is very rigid thinking.

Saul

10 Likes
13

I’m not sure why anyone should expect that they will continue to have (or need) 6.1 closings per community. You guys are losing track of their expansion. For example, in Texas they were selling homes at $165,000 or something like that, and selling high numbers. In Seattle they are selling them at $375,000, and presumably one closing will not only bring more than double the revenue but probably triple the profit. But there’s no way they will sell six $375,000 houses per community. Those communities will probably be happy with selling three. And they are building higher price communities even in the Houston area, according to a recent press release. Here’s a link to the website: http://www.lgihomes.com/community.cfm?id=magnoliareserve

I may be completely wrong, but I think fixating on number of closings instead of thinking about total revenue coming in, and about earnings, is very rigid thinking.

Saul,

You made some good points about the higher priced homes. It’s interesting because it a shift or pivot in their target demographic. Previously, they were trying to sell to apartment renters making the argument that the renter can lower his monthly housing expenses by buying instead of renting. The higher the home price, the more likely the buyer will be upgrading from a lower priced home (i.e. not a first time homeowner).

I went through putting together the model to see if it could be realistic for LGIH to hit their 4700 guidance in 2017. Yes, the model is pretty simply and there are some assumptions in it. However, the 6 homes sold per community has been stable now for 3 years. The vast majority of the homes will still be in Texas and other markets that are much lower priced than Seattle. Therefore, I think that the AVERAGE of 6 homes per ASC can still be applied and result in a pretty accurate picture of what LGIH might achieve in 2017 even if some communities sell fewer homes. The main thing I tried to test was whether it is realistic for LGIH to achieve 4700. It may not be that important in the big picture (as Saul has pointed out with respect to revenue and profit) but there will be a perception that growth is slowing if housing unit numbers sold are no longer growing fast. I have convinced myself that things are not as bad for LGIH as some people fear.

Chris

2 Likes
14

I have convinced myself that things are not as bad for LGIH as some people fear.

Me too, but I’m always aware that I could be wrong (I just can’t imagine how in this case).
Saul

15

The higher the home price, the more likely the buyer will be upgrading from a lower priced home (i.e. not a first time homeowner)

I think this assumption is incorrect. The higher price is just the reflection of geography. The coastal markets are expensive and the rent for apartment on downtown Seattle is $2000 per month for a 450 sqfeet studio.

I could be wrong but the last time I checked LGIH is squarely focused on first time home buyers or entry level homes.

I am not convinced LGIH can have better margins on these higher priced houses either. But that needs to be seen.

4 Likes
16

I think this assumption is incorrect. The higher price is just the reflection of geography. The coastal markets are expensive and the rent for apartment on downtown Seattle is $2000 per month for a 450 sqfeet studio.

It depends. In Seattle maybe so, but if they are building higher priced homes in the Texas markets then it’s not just geography for those homes.

I could be wrong but the last time I checked LGIH is squarely focused on first time home buyers or entry level homes.

Maybe not exclusively anymore. If they building more luxurious homes in Texas then it seems they are expanding into new target demographics.

I am not convinced LGIH can have better margins on these higher priced houses either. But that needs to be seen.

Again this depends on the geography. Land/lot acquisition costs will be higher in Seattle. But if they are building higher priced homes in Texas then the extra costs of building a bigger house there should be dwarfed by the higher price that LGIH can charge for the home. I would expect percentage margins to be higher for higher priced homes if the higher price is driven by a higher end home and not just by a higher market price due to geography.

1 Like
17

I’m not sure why anyone should expect that they will continue to have (or need) 6.1 closings per community. You guys are losing track of their expansion. For example, in Texas they were selling homes at $165,000 or something like that, and selling high numbers. In Seattle they are selling them at $375,000, and presumably one closing will not only bring more than double the revenue but probably triple the profit. But there’s no way they will sell six $375,000 houses per community. Those communities will probably be happy with selling three. And they are building higher price communities even in the Houston area, according to a recent press release. Here’s a link to the website: http://www.lgihomes.com/community.cfm?id=magnoliareserve

I may be completely wrong, but I think fixating on number of closings instead of thinking about total revenue coming in, and about earnings, is very rigid thinking.

Saul,

I was badly hurt following a Guru here on the Motley Fool in 2008. (I probably would have been hurt anyway.) However, I now have trust issues. So, I hold zero of your portfolio, but I have been adding them to my CAPs page.

For the first time ever my CAPs page turned green.

However, I removed LGIH from my CAPS page a while back. The are missing targets and they have higher debt than their peers. I am worried not only about the debt, but the business in total. It is one thing to build houses in Houston where running a bulldozer in your back yard does not require a permit, and quite another in the Pacific Northwest where you need a permit to trim your trees.

With these two company issues in mind. (Debt and New business environment)I am watching the rate of growth slow down a bit and the housing closing miss estimates. When I see that I had the same reaction as you. Well they are more expensive houses and the top revenue line is still growing maybe even accelerating. But that debt thing keeps nagging at me.

Then when I see you come out and shift the goal posts, (Not the leadership of LGIH . . . yet) I remember one of the axioms about a business in trouble is it keeps shifting goals or businesses. I see nothing wrong with your analysis. It is mine, but the change from homes sold as the case for the stock to gross revenues, while quite reasonable, gives me a queasy feeling.

By the way, I have created a spread sheet with your latest holdings. I will be going over the Annual reports and Investor Relations websites. It will take a while. Once I have a confidence rating I can apply I will buy the lot in the proportions that I want. This will NOT be a significant portion of my net worth, but represents a bit of money I had set aside for technical trading.

As I studied probability and calculus and statistics in R, I realized that attempting to trade technical s by myself with the skill set that I had was like showing up at the OK Corral at noon, armed with a banana.

Once I go over the reports and assign a confidence rating, 100 percent being take an 8 percent position with my mad money, and I have allocated all of my mad money I will buy the port. Right now I just don’t see LGIH getting a lot of confidence. Of course this could change.

Cheers
Qazulight

7 Likes
18

if they are building higher priced homes in the Texas
If they building more luxurious homes in Texas
if they are building higher priced homes in Texas

Too many if’s. :slight_smile:

You don’t go to Ross to buy $500 tux. Just like you have brands in clothing, you have brands in housing too. I am not aware of multiple brands or a luxury brand from LGIH. In any case it is easy for you to verify all this with their IR.

The higher price house meaning higher margins is a simplistic approach and it doesn’t work like that neatly. In fact, the reason I posted the rent for a 450 sqf studio as $2000 per month is, LGIH is building houses in Seattle with a monthly mortgage payment of $1500.

So that’s the market they are targeting.

1 Like
19

Dang!!! My goodness!!! Long thread and it has made be do waaaay more data gathering, because the thread is long comments and short facts.

So here are facts (even if facts do not lead to any meaningful conclusion)

I looked up EVERY DAMN COMMUNITY that LGIH lists on their website. Despite the number of active communities LGIH states in the press releases, they actually list 77 communities for which they are quoting monthly P+I payments. There are several others that the list as “call for prices”, at least one “grand opening” and two or three “coming soon”. They do not give the asking price for all of the models offered. They usually have what, 5 or 6 models? They disclose the sales price for only the lowest priced model. Others on this board can estimate the median price among those models, and how much higher it is than the lowest, and I am sure these medians vary from the least expensive areas and the most expensive areas.

So, in Q4, the average price was $208,000. Here are the number of communities with various lowest asking prices :

<$180,000 33
$180,000-$210,000 22
$210,000-$250,000 5
$250,000-$350,000 8
$350,000-$512,000 9

I still have the spreadsheet. If anyone wants data for price spreads other than the above, just ask.
I haven’t come to any conclusion. I did use a +9% increase over Q4 average sales price when I did my 2017 profit estimate. I guess this is information that doesn’t increase knowledge, or at least does not enlighten.

KC, long LGIH, short enlightenment

11 Likes
20

Hi Qazulight, Thanks for an interesting discussion.
Saul