The company guided 4000 to 4300 closing on August 9th. So far they have closed 3696. Based on this,
4000 4150 4300 3696 3696 3696 304 454 604
Since December is typically a slow month, I think the company may not meet its mid-point guidance. I think this is telegraphed well by the monthly home closing figures. 4Q EPS could miss street expectation and street can act surprised or you can argue the 20% price decline in last 3 months already reflects this.
I think we can safely assume 4100 closing for 2016, most like the company will close around 4130. I also further assume the closing will grow 20% and 15% for the next 2 years, that would result in 4950 (rounded #) for 2017, 5700 for 2018. That is 1600 more home closings by 2018, which is 40% higher home closing from now. The reason I am mentioning this is that’s a pretty steep growth. On top of this you can add 3% ASP (average sale price increase) growth. This kind of growth can easily put the EPS in $4.25 to $4.5 range assuming no margin dilution and net profit margin in the range of 8.5%. Of course any tax cut by the new administration can be helpful as LGIH is currently in 35% tax category.
Now that we have a template for the potential growth, profit, EPS, let us see review the land (lot) situation. Based on 3rd Qtr 10Q
Owned Controlled Total Texas 10,524 6,510 17,034 Southwest 1,884 1,106 2,990 Southeast 3,969 2,333 6,302 Florida 1,620 902 2,522 Northwest 771 237 1,008 Total 18,768 11,088 29,856
Of the 18,768 owned lots as of September 30, 2016 , 11,847 were raw/under development lots and 6,921 were finished lots (including homes in progress, sales offices and completed homes). In total about 40% of the lots are raw land or under development and 23% are finished lots 37% are optioned.
If you take 4100 closing then you have 7.28 years of land supply and may seem a bit excessive especially considering the company constantly increases its land bank. On the other hand, if you assume the growth, by 2018 5700 closings, and further assume all optioned lots are finished lots (which may not be true, there could be land options too but we are making the extreme assumption anyhow) then the finished lots supply would be 18000 and that would be 3.15 years of supply.
If the company pursues its growth strategy then their land position is very well justified. Also note development of lots from raw land costs lot of money and the 6900 finished lots should be valuable more than their book value. As the company builds house and closes them they can extract profits from them.
The bottom line is, if the growth continues then the company may have to take additional debt and not reduce. Also the company takes about 40 to 45 days to complete the house so there is not much efficiency there to wring out to reduce WIP inventory.
on debt, specifically on revolver
I have already mentioned I see the lack of permanent debt as a concern. From the latest 10-Q
The A&R Credit Agreement requires us to maintain a tangible net worth of not less than $202.5 million plus (i) 75% of the net proceeds of any equity issuances and (ii) 50% of the amount of our net income in any fiscal quarter after the date of the A&R Credit Agreement, a leverage ratio of not greater than 67.5%, liquidity of at least $40.0 million and a ratio of EBITDA to interest expense for the most recent four quarters of at least 2.50 to 1.0. The A&R Credit
Agreement contains various covenants that, among other restrictions, limit the amount of our additional debt and our ability to make certain investments.
This is one of the reasons I am not a big fan of relying on revolver for financing. Ideally I like to see companies rely on revolver only for working capital. In the case of LGIH, there is a big fixed cap in the form of land inventory and that should be financed by permanent debt rather than revolver
on ATM facility
The company has an ATM (At the market) facility to sell equity at the market price. I know many REIT’s use this to constantly issue equity as they have to constantly raise capital. This is an overhang. I would rather see the company does a secondary and be done with it. I can understand that would temporarily impact EPS but if they are serious about growth and need capital for the growth then they have to bite the bullet on some of these things.
What the above means is the company is not really in a position to support its stock price (except jaw-boning) even if they think the price is undervalued.