LGI Homes - A Very Appealing Public Offering

| About: LGI Homes, (LGIH)

LGI Homes (NASDAQ:LGIH) made its public debut on Thursday, November 7. Shares of the fast growing homebuilder ended their first day with gains of 17.3%.

The homebuilder shows very solid and profitable growth. Trading around the low end of the preliminary offering range, shares do certainly offer appeal to long term investors.

The Public Offering

LGI Homes is a fast growing homebuilder engaged in the design and construction of entry-level homes in Texas, Arizona, Florida and Georgia.

LGI's business model is based on the building of high-quality entry-level homes at attractive locations with features which appeal to renters. Fast build times, high inventory turnover and strong return on capital are key attractions to the company's business model.

Founded in 2003, the firm has sold and built over 5,000 homes and has been profitable in each year, even during the housing downturn.

LGI Homes sold 9 million shares for $11 apiece, thereby raising $99 million in gross proceeds. All of the shares were being sold by the company, with no shares being offered by selling shareholders.

Initially, bankers and the firm set an initial price range of $13-$15 per share. Shares were eventually sold far below the low end of the initial public price range.

Some 46% of the total shares were offered in the public offering. At Friday's closing price of $13.04 per share, the firm is valued at $253 million.

The major banks that brought the company public were Deutsche Bank, JMP Securities, J.P. Morgan (NYSE:JPM), Barclays, Bank of America/Merrill Lynch (NYSE:BAC) and Builder Advisor Group.


LGI Homes was founded in 2003, targeting the entry-level market. The unique operating model based on an effective and efficient method to built and sell homes, has been really successful.

The company's focused sales and marketing organization targets the entry-level home buyer by educating them on the benefits and affordability of homeownership. The very high sales volume in relation to size of operations results in a lot of demand, and therefore good relationship with subcontractors. LGI achieves an inventory turnover of 2.5 times for 2012, which compares favorably to an average of 1.0 times for its group of publicly traded homebuilders.

LGI focuses on entry-level homes ranging from $115,000 to $260,000, with features which appeal to renters as well.

For the year of 2012, LGI Homes generated annual revenues of $76.2 million, up 51.1% on the year before. Net earnings attributable to shareholders roughly tripled to $9.7 million.

On an adjusted basis, when including the investment in the LGI/GTS joint venture, revenues for 2012 totaled $143.4 million, up 74.3% on the year before. Net earnings more than doubled to $18.5 million.

Reported revenues for the first six months came in at $59.3 million, on which it reported $7.6 million. On a non-GAAP basis, including LGI/GTS, revenues came in at $96.0 million as earnings totaled $11.3 million.

The company operates with $15.2 million in cash and equivalents. Total debt, including operating leases, totaled $25.1 million, resulting in a modest net debt position of around $10 million.

LGI stands to receive $99 million in gross proceeds from the offering. Some $36.9 million will be used to make payments to GTIS to acquire all of GTIS' interest in the LGI/GTIS joint venture. As such, LGI will operate with roughly $40 million in net cash following the offering and the deal.

With the equity in the business being valued around $253 million, LGI's operating assets are valued around $213 million. This values operating assets of the firm at 1.5 times annual revenues on an adjusted basis and 11-12 times non-GAAP earnings.

Investment Thesis

As noted above, the offering of LGI Homes has been a bit disappointing. The company priced the offering at $11 per share, some 21.4% below the midpoint of the preliminary offering range. Ever since, shares have seen a recovery, trading some 6.9% below the midpoint of the preliminary offering range.

For the first half of the year, LGO closed 664 home sales in 18 communities at an average home price of roughly $145,000. The company reported $96 million in revenues, including the purchase of the remaining interest in the joint venture LGI/GTS, as earnings totaled $11.3 million.

The continued housing recovery and solid operations growth is still resulting in very strong growth, with the business being valued at 1 times annual revenues and less than 10 times earnings, which is quite appealing given the growth. A derail of the housing recovery and increased competition are key risks.

For now the valuation is very appealing to me, and I might initiate a long position in the coming days.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.