623 closings in one month!
Up 75% from 355 a year ago!
1511 closings in one quarter!
Up 34% from a year ago!
Up 33% from the previous all-time record!
Up just 99% sequentially!
And 623 closings, divided by 71 active developments, gives me an absorption rate of 8.8 per development, by far the highest ever!
Who has lost faith in management?
Saul
Here are some things to consider:
LGIH had an inventory problem in Q1 2017. They didn’t build enough homes to meet demand. So we need to take the sequential numbers with a grain of salt. The questions are how many of the June homes sold were still filling backlog and how strong is current demand.
Despite the backlog, June closings were much higher than expected.
I’m sure LGIH is still raising prices so the y/y numbers will look better than the increase in home sales numbers.
Unit home sales are still decelerating. Growth in 2015 (from 2014) was 44.5%, growth in 2016 (from 2015) was 22.3%, and growth in 2017 (from 2017) will be 20.1% if they sell 5000 homes in the year. It looks like they may exceed 5000 homes in 2017 so they may see flat unit acceleration from the prior year (but earnings will be up due to price increases.
They reduced their number of active selling communities from 72 to 71 from end of May to end of June. 623 / 71 is 8.77 while 623 / 72 is 8.65. This is a minor difference and still very high high. Again, the real question is how many of the sales were backlog from their Q1 inventory problem versus new, recent demand.
Interest raises have spiked recently. Will this slow demand or will it further increase demand because people want to buy now before rates go up more? Will rates come back down or will they continue to rise? The spike is due to a decrease in demand for US treasuries. If demand for treasuries keeps decreasing then I wonder if more people are beginning to put more money to work in stocks. For years people have been afraid of stocks due to the memory of the 2008 crash and then 2000 crash. I still think that there will come a time when this fear will be replaced by a fear of missing out on future gains.
It will be very interesting to hear what LGIH homes has to say during the next earnings call. Have they completely corrected the inventory problem? Are they now building enough homes to meet demand? Is demand continuing to show strength?
My opinion is that as of right now it looks as if they will crush their 2017 guidance. It is likely that they will raise their guidance at the next conference call.
Chris
Hi Chris, Thanks for your comments.
Just for a wording correction. You wrote: Unit home sales are still decelerating.
You meant to say that the: Percentage growth year over year of unit home sales is still decelerating because of the law of big numbers.
Unit home sales are still growing of course.
Best,
Saul
To be honest, today’s reaction is about what I would have expected if the closings had been between 425 and 500. At 623, I’m a little surprised the stock isn’t up double digits.
I’m calling it a buying opportunity, and I’m buying. Time will tell I suppose. But Q2 is certain to be a blowout. In Q1, they had 10% fewer closings YoY, and still managed nearly the same revenue and EPS as the YoY quarter. Well, in Q2 closings are up 34% YoY (not a typo). So revenue will be up well over 40%…market was expecting 26% per Yahoo.
All that to say, why isn’t the stock up more today??
I’ll take it.
Bear
Yes, Saul, that’s what I meant.
I’m calling it a buying opportunity, and I’m buying.
Bear, given that you are fully invested, what are you selling to buy LGIH?
All that to say, why isn’t the stock up more today??
Perhaps because yesterday’s close was already up about 23% since the end of May?
Perhaps because yesterday’s close was already up about 23% since the end of May?
So you’re saying it was already priced in? Sure, it has been on a very good run…but there’s just a big difference between a normal great month (500ish closings) and an unexpectedly huge month like they just had. They’ll beat on revenue and EPS this quarter by a lot more than I would have expected in my highest estimates. Hard for me to believe the market saw all those closings coming…even if some folks did, others surely did not…and that’s how markets work, right?
Bear
PS - Oh and Chris, I didn’t sell out of any positions. I just trimmed a few to raise money for LGIH. Hard to do as everything’s down the last few weeks, but I tried to trim the stuff that was down the least (TLND, TWLO) and lightened up on SHOP a bit. I’ve added tiny amounts to MULE and HUBS already this month, so I didn’t trim them.
Congratulations on your conviction, I remember you adding on Wells Fargo dip.
Chris,
I thought of one other thing to consider. Maybe minor, but could affect margins for Q2 if not moving forward.
We don’t know what expenses were incurred fixing the backlog/inventory issue. With such a great month and quarter for closings, and everything looking like it is running great, I doubt it has much meaning going forward. I only bring it up because it could come up on next earnings call, and it if the market is looking for a reason to not reward them, that may be it.
Again, long term, I don’t think it is issue at all. Anyone looking to buy now just to sell after an earnings pop might want to think about it is all.
Kevin
So you’re saying it was already priced in?
I’m saying it was already up 23% in just over a month. To me it seems wrong to try to interpret today’s rise solely in the context of the new numbers when it was already up 23% in just over a month.
I do not do charts (and avoid listening to those who do, it just doesn’t work for me) but I do find graphs informative. Look at a one year graph of LGIH; there is lots of volatility, but the recent rise is not characteristic of the last year. It is characteristic of expectations of very good news. If the news was merely very good I would not have been surprised by a slight drop. Instead the news was very, very good and we got a nice but modest rise.
Great Job Saul. When we were talking about this back in May it looks like that was the bottom. Its funny how the greatest pessimism seems to find the bottom. This is a very cyclical Industry. Just where in the cycle do you think it is at now?
Andy
No position in LGIH and will not be taking a position
This is a very cyclical Industry. Just where in the cycle do you think it is at now?
Sorry Andy, but I know nothing at all about the real estate cycle.
Saul
If the news was merely very good I would not have been surprised by a slight drop. Instead the news was very, very good and we got a nice but modest rise.
That may very well be correct. I wasn’t reading so much optimism into the price, despite the 20%+ rise. Yahoo’s listed expectations for Q2 are revenue up 26% and EPS up about 15%. Increased confidence in just hitting those numbers seems like reason enough for a stock to rise, especially a stock so many have previously doubted, trading at such a reasonable PE. I would expect at least some buying on confirmation that all is well. But hey, perhaps some are selling because they bought for a short term pop.
But I’m well aware that we can drive ourselves crazy trying to figure out why a stock does what it does when it does.
Other interesting bits about LGIH:
UNDER THE RADAR Maybe, just maybe, it’s going relatively unnoticed? It’s not a particularly high volume stock. Even more so, the lack of after market and premarket activity for LGIH has always surprised me. Just a few hundred shares even on a big announcement like this. There either aren’t many people doing short term trades on LGIH, or they’re waiting for something else. Now that I think of it, I wonder if a lot of the trades involving LGIH have more to do with macro factors and perceptions about the housing market than LGI’s fundamentals.
HUGE SHORT INTEREST Speaking of short term action, the short interest on 5/31 was 5.8M shares, already a huge 25% of all shares! But then on 6/15 it was 7.5M shares, or more than 32% of all shares. Huh??? While the shares went from $32.40 to $37.06??? Somebody riddle me that.
EPS COULD SOAR It’s interesting to ponder what EPS will be. Let’s guess. If their ASP holds (not even figuring an increase), revenue would be 323M. Wow. That’s 45% up YoY. Factor 26.5% GM, and Gross Profit is over 85M. The most they’ve had in a quarter EVER was Dec 2016: 64M. Even if Op Ex is up…let’s say it’s up 50%, ha…that would leave them with 41M in op ex. The most they’ve ever had is 34M. All of this is beyond worst case, and that figures to around $1.25 in EPS for the quarter, vs 1.10 expected. With rosier math I think they could easily see over $1.50.
I always focus on LGI’s fundamentals. But maybe that’s not driving the day-to-day price fluctuation. This makes me even more bullish at current levels.
Just a very interesting stock to follow.
Bear
Now that I think of it, I wonder if a lot of the trades involving LGIH have more to do with macro factors and perceptions about the housing market than LGI’s fundamentals.
Hi Bear, I’m sure you are at least partially correct about that.
Saul