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Summary

  • LGI Homes’ share price is doing very well despite the overall weakness in the housing sector.
  • The company is on track to deliver another stellar quarter and report far above analyst estimates.
  • There is still plenty of upside left based on my price target.

LGI Homes (NASDAQ:LGIH) is performing quite well despite the weakness in the housing sector. The stock is up 14% since my early April article, while the housing ETFs, XHB and ITB are down around 5% each. This is not surprising and largely in line with my expectations that LGI should easily outperform the sector given its strong growth and execution. The company is on track to blow past analyst estimates when it reports Q2 results next week, since analysts are out of sync with the number of home closings in Q2 and overall price trends. The rise in the share price since early April reflects LGI's growth prospects compared to its competitors, and there is still plenty of upside left to my $34 price target.

Q2 home closings indicate higher-than-expected revenue and earnings growth

LGI reported record Q2 home closings in early July. Home closings in Q2 reached 662, finishing the first six months of the year with a total of 1,147 homes closed. This represents a 72.7% increase over the first half of 2013. At the end of June 2014, the company had 31 active selling communities compared to 18 active selling communities at the end of June 2013. Judging from the previous pricing trends and management expectations for a sequential increase in average selling prices between 2% and 3%, it would be reasonable to assume that the average home selling price in Q2 was between $158,000 and $160,000. Based on these expectations, Q2 revenue should be between $104.5 million and $106 million, which is way above analyst estimates for $90.8 million (see the tables below). I suppose that the estimates are heavily influenced by the lowest estimate of $68 million (since only 5 analysts are covering the stock), which is even below the Q1 revenue. The highest estimate is $104 million, which seems the most accurate given my own calculations. EPS should be between $0.39 and $0.43, as opposed to current consensus of $0.33.

Source: Yahoo! Finance, Author's estimates

LGI is also doing well on the development front. The company announced in mid-July that it acquired land in the Charlotte market for approximately $15.4 million. This is another move toward the expansion in the Charlotte market, as the company just began its growth there, which accounted for a small portion of total revenues. The move should accelerate the overall growth rate in the next couple of quarters and enable the company to further diversify its geographic footprint.

The second quarter report is likely a strong catalyst for a higher share price in the next couple of months. The company should also reveal July home closings and provide more color on the trends in the second half of the year, so we can get a better picture on the growth trends. I continue to expect full-year home closings in the range of 2,400 to 2,600, which is quite higher than management guidance for 2,200 home closings. I have argued in my previous article about the reasons for the higher rate of home closings, and the second quarter trends clearly indicate that the company should at least achieve the lower end of my estimate. If we take a look at the trend in 2013 and the fact that the company had 41% of full-year home closings in the first half of the year, it is normal to assume that even my estimates are conservative, and that LGI might have more than 2,700 closings in 2014. But it is better to be conservative here, since the housing market is softening lately, although that was not felt in LGI's home closings trends in the first half of the year.

Conclusion

LGI Homes is on track to deliver Q2 revenue and earnings far above analyst estimates. This will likely be a strong catalyst for a higher share price in the next couple of weeks, and enough to defy the potential deterioration in the housing sector (I am referring to the movement of the sector in the stock market). The company will also likely defy the slowdown in the housing sector due to its small size and geographic expansion. I am reaffirming my $34 price target ahead of Q2 earnings, which implies 80% upside from the current price.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in LGIH over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.