Description

LGI is one of the fastest growing homebuilders in America headquartered just outside of Houston, Texas. The company operates in 83 communities, and continues to grow this number at an attractive rate. The business is owner-operated, with the founders and current CEO Eric Lipar owning over 17% of the shares outstanding. Despite being one of the premier homebuilders in the U.S. with some of the highest returns on capital in the industry, LGI trades at a discount relative to most of its homebuilder peers (who already trade at a significant discount to the overall market). LGI trades at only 10x forward earnings. The company operates in 20 out of the top 50 metropolitan markets and in only 12 states in the US, implying that the business has significant expansion opportunities. Finally, as the company continues to gain scale, there is meaningful room for EBIT margin expansion.

LGI’s business model is to make housing affordable for low-income buyers by building in geographies that are 30 to 60 minutes in driving distance from major U.S. cities. Its process—from land procurement, to construction, to marketing and sales—is highly disciplined, scientific, and repeatable. This model has allowed LGI to gain significant market share and grow from being the 114th largest U.S. homebuilder to the 15th biggest in just a decade. LGI has accomplished this while producing some of the highest profit margins and returns on capital of any homebuilder and while being profitable every year, including during the Great Recession. In terms of quality and customer satisfaction, its homes are ranked in first place by consumer reviews at Consumer Affairs. For those interested in a longer description of LGI’s business model, we highly recommend reading the company's recent profile as Professional Builder’s 2016 Builder of the Year:

https://www.probuilder.com/2016-builder-year-lgi

Housing construction in the United States is still weak by historical standards. There is substantial data that gives us confidence in this perspective: single-family starts have been particularly slow to recover, holding well below one million units every year since 2008—a level that, until the crash, had been posted only five times since 1976. As a result, vacancy rates and inventories of homes for sale have fallen sharply. The national vacancy rate has receded to its 2000 level, erasing all of the run-up at the height of the housing boom. The supply of existing homes on the market stood at just 3.6 months, marking the fourth consecutive year that supplies held below 6.0 months (the conventional measure of a balanced market). Real home prices are still 9%-16% below the mid-2000s peak. Real spending on single-family construction totaled a modest $243 billion last year, close to the level in 1996. Residential construction in the past decade has added fewer units to the housing stock than in any 10-year period in records dating back to 1968. The number of housing completions between 2007 and 2016 totaled just 9 million units, far below the 15 million-plus average for every 10-year period from the 1970s through the 1990s. [2017 State of the Nation’s Housing by Joint Center for Housing Studies of Harvard University (http://www.jchs.harvard.edu/research/state_nations_housing)]

Last quarter, the ratio of U.S. mortgage debt service to income hit 4.4%—the lowest it has been since the Federal Reserve started measuring this metric in 1980—showing mortgage payments relative to a person’s income is the healthiest it has ever been.

These factors amount to what look like strong tailwinds for LGI to continue growing. Backlog is at a record high for the company, while the cancellation rate on LGI’s homes are at their lowest point in five years. LGI should sell approximately 5,000 homes this year at an average price of $215,000. The company earns an average profit of $19,000 per house and should produce approximately $4.50 in earnings per share this year. Despite these factors, LGI currently trades at 10x P/E. LGI earns a 25% return on each dollar it reinvests into the business which, combined with the strong data on U.S. housing, should allow the company to continue to grow its earnings per share at a double-digit rate.

Catalyst

- Double-digit EPS growth

- More investors learning about LHI's business model and competive advantages