I belatedly entered data to determine LGIH’s inventory of lots expressed as years of inventory (total lots divided latest quarter closings). The number is 6.4 years. For the last 9 quarters the number has bounced around between 7.9 years and 6.2 years. Business as usual.
In the process of entering the data I became interested in the growth rate of closings and the deceleration of growth. Longer term followers of this board will remember discussions about deceleration of growth, particularly for SKX. That was a different situation as the deceleration of growth coincided with expansion of p/e. But, my question then was trying to read the tea leaves and guess the equilibrium (if there is such a thing in retail sales) growth rate. For U.S. sales, that turned out to be a negative growth.
For LGIH growth rate I used the current trailing 12 month closings divided by the trailing 12 month closing for year ago quarter. Here are the last 8 quarters’ numbers:
367%
157%
94.5%
82.5%
44.5%
40.5%
27.7%
22.2%
If LGIH meets its 4,700 closings target for 2017 the growth rate at year end will be 12.9%. In the meantime, inventory value increased 35%. Land inventory increased 50%, homes in progress decreased 13.5% and completed homes increased 41%. They are growing just as fast as they can. That may explain why they ran out of houses to sell in Texas but completed homes were reported up so much. They just shortchanged Texas while building up the new markets. That’s my interpretation. A temporary misallocation of capital. Thus poor January closings and the buying opportunity in February.
LGIH net income was $75 million and ending inventory was $718 million. In the spirit of being approximately right rather than exactly wrong, I propose that LGIH can increase inventory by 10 or 11% by investing net income in inventory. If I understand the lending covenants correctly, they can leverage that to 15 to 16% inventory increase. Beyond that, to achieve, say, 20% inventory increase they would need 3% shareholder dilution through ATM sales.
Slower growth is a mixed bag. Of course the average sales price is increasing and margins so far are stable. That is the good news. Part of that increase in ASP is due to higher land values in the new markets. Some is due to the hot real estate markets almost everywhere, which I suppose is allowing them to maintain margin. Our daughter bought a house in the Seattle area and for two years the value has compounded at 12.5%. And as a first time home buyer she leveraged the downpayment 23.5 times based on the purchase price. Ka-ching, ka-ching. Those things are favorable to LGIH, too.
So right now, LGIH has decent, but not great growth in terms of closings and a very favorable tailwind in average sales price pushing up revenue growth. As they pmove into the midwest, might the house prices be less than on the coasts? There would be multiple factors in LGIH’s choice of new markets, but one would be simply the addressable market as would be the ‘heat’ of that market. Will the newest markets be less attractive? How many communities will they support compared to Houston or Phoenix? I would note that the homes they advertise as being in the Portland, Oregon market are actually in Washington—and not just across the river in Vancouver but quite a bit north of that. O.k., this fits with the ‘further out, cheaper land’ approach that LGIH has and is taking. But across those bridges on Friday afternoon is a little different than another mile out Camelback in Phoenix. Just sayin’. Is there anything to be gleaned from that?
Conclusion? Don’t look at just 2014 vs. 2015 vs. 2016 year-over-year growth and extrapolate to milk and honey. Current growth is less. Think about the impact of home price increases decelerating (heaven forbid, leveling off). Compare the p/e to other homebuilders, not the S&P. Scott Fearon mentioned CCS. CCS ought not be news to LGIH investors. Anyone with significant investment in LGIH withoug knowing of CCS didn’t perform due diligence. The projection of $4 up from $3.40 is 18% which is better than a stick in the eye but of course it will be all about what is already priced in and what the outlook is. The market values it at 10.2 p/e now so why would it award a higher multiple a year from now?
I haven’t made my ‘final answer’ on LGIH. It is no longer my top holding. Still about average while I think it over.
KC