LGIH - LGI Homes: Time To Exit

2023-07-10 17:06:03 ET

Summary

• Today, we take a deeper look at LGI Homes, whose stock is up by a third in 2023 despite mortgage rates rising to nearly seven percent.
• However, profits are poised to fall sharply in 2023, analysts are not sanguine on the company's prospects, and insiders took considerable profits in February at lower prices.
• Time to cash out of this well-run homebuilder? An investment analysis follows in the paragraphs below.

"Reality is the leading cause of stress amongst those in touch with it ." - Jane Wagner

Today, we put LGI Homes, Inc. ( LGIH ) in the spotlight. I have made a good spot of coin trading in and out of this well-run home builder since the start of the pandemic, which helped trigger significant migration out of the cities into the suburbs as well as to other states.

The company's footprint was well-positioned for that event as it operates in some of the fastest-growing states in the Union. Despite average mortgage rates nearing seven percent, LGI Homes, like most homebuilders, has enjoyed a stellar 2023 in the market. The stock is up a third year-to-date. Can the rally continue? An analysis follows below.

Company Overview:

LGI Homes is based just outside of Houston, TX. The company builds entry-level homes and active adult homes under the LGI Homes brand name as well as luxury series homes under the Terrata Homes brand name. Its communities are primarily in Texas, Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina, South Carolina, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon, Nevada, West Virginia, Virginia, Pennsylvania, and Maryland. Currently, LGI Homes operates via 99 communities in 35 markets and 20 states. The stock currently trades just north of $125.00 a share and sports an approximate market capitalization of $2.90 billion.

First Quarter Results:

On May 2nd, the company posted first quarter numbers . LGI Home delivered a GAAP profit of $1.14 a share, 11 cents under expectations. Revenues fell nearly 11% on a year-over-basis to $487.3 million, which was nearly $20 million above the consensus. Average sales price rose 4.5% from the same period a year ago to just over $355,000.

Cancellation rates remain fairly constant at just under 16% while new orders increased 12.5% from 1Q2022 to 2,219. The company's order backlog stood at 1,555 homes valued at $561.4 million. Notably, this is the company's lowest order backlog in over four years. The company had 1,366 home closings in the quarter, down nearly 15% year-over-year. Management provided guidance that it expects it will have between 6,300 to 7,000 home closings in FY2023 at an average sales price of between $345,000 and $360,000.

LGI Homes closed 557 homes in April, 633 in May, and 664 homes in June for a total of 1,854 homes in the second quarter as the company has had a strong Spring selling season it should be noted.

Analyst Commentary & Balance Sheet :

Since first quarter results came out, BTIG ($77 price target), JPMorgan ($90 price target), and Wedbush ($89 price target) have maintained Sell/Hold ratings on the stock. Seaport Global ($156 price target) and JMP Securities ($130 price target) have reissued Buy ratings on the equity.

Just over 15% of the stock's overall float is currently held short. Several insiders sold just over $9 million worth of shares collectively in February of this year in the low to mid $100s. That is the only insider activity in the stock so far in 2023.

LGI Homes ended the first quarter with total liquidity of nearly $360 million. This included $43 million of cash on hand and just over $315 million of available capacity under our unsecured revolving credit facility. After the first quarter ended, management amended their revolving credit agreement. This increased the credit facility to $1.13 billion (Up $30 million). They also extended the maturity for $775 million through 2027. The company's debt-to-capital ratio was 38.4% at the end of the first quarter, down 500 basis points from the end of September. Finally, book value per share ended the quarter at $71.14.

Verdict:

LGI Homes made $13.76 a share in profit in FY2022 on revenues of $2.3 billion. The current analyst firm consensus has earnings falling to $7.61 a share in FY2023 as revenues rise some seven percent to $2.47 billion. They see quite the bounce back in FY2024 as earnings grow to north of eleven bucks a share as revenues soar by more than 25%.

Homebuilder stocks have had a remarkable run in 2023 given the rise in mortgage rates and overall economic uncertainty in the market. Home prices (down 3.1% year over year in June) have held up quite well despite the fall in existing home sales. This is largely due to the lack of inventory (3 months' supply as of June) as few existing homeowners want to give up their three percent mortgages even to lock in considerable capital gains.

However, if the country enters a recession, which seems a likely possibility over the next year; job growth will reverse. This will lessen demand and increase supply. I think LGI Homes, Inc. is a wonderfully managed firm, but the homebuilding sector is notoriously cyclical. Paying nearly 17 times forward earnings (just under the overall market multiple) coming out of an economic contraction could entirely be justified. It just isn't heading into a possible recession. Insiders were taking some chips off the table in February when the stock was approximately 20% lower. Given that, if I had currently had a stake in LGIH, I would be inclined to take profits as well.

"The eye sees only what the mind is prepared to comprehend ." - Robertson Davies

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