LGI Homes - Back In The Buy Zone

Dec. 02, 2019 1:21 PM ETLGI Homes, Inc. (LGIH)12 Comments
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Summary

  • A market correction has brought LGI Homes' stock in the buy zone (10x PE).
  • Comparing the valuation with peers, LGIH appears to be fairly valued, but with a greater growth potential.
  • Based on the active communities growth, a projection of future active communities, home closings and revenue reveals a strong growth potential ahead for investors.

Introduction

LGI Homes (NASDAQ:LGIH) stock is down ~18% since my previous article “LGI Homes: Justified Rally, But Don't Chase It Here”. In my opinion, this was an expected correction and it has brought the stock back to a buy zone.

Reduced interest rates have increased the home affordability to a 3 year high. The demand for LGI Homes’ entry-level homes is strong and through this article, I aim to explain a 3 year projection for the company to support my investment thesis.

Growing no. of active communities and home closings

Source: LGI Homes website

LGI Homes typically targets land acquisitions that are further away from urban centers than many other suburban communities but have access to major thoroughfares, retail districts and centers of business. This way, they offer better value for the homeowner through either lower price points or larger lot sizes. The company’s primary customer base is entry-level home buyers. This strategy has been great to attract millennial home buyers who are increasingly leaving bigger cities in search of cheaper housing and better schools.

Since 2016, we have seen a 75% increase in the no. of active communities. Assuming a modest 15% annual growth in the no. of active communities (this number is far less than the growth % we have seen so far), I expect LGI Homes to have around 160 communities by 2023.

Source: Author’s calculations

Assuming a 10% increase in annual home closings, I anticipate LGI homes to close approximately 10,000 homes in 2023.

Source: Author’s calculations

With the home closings projections and the price/closing, I calculate the following revenue growth over the next 3 years.

Source: Author’s calculations

With a projected revenue of $2.5 Billion in 2023, and an assumed P/S ratio of 1.25, there is a three-year price target of $140.

Valuation

Currently, LGI Homes is valued fairly when compared to other home builders (NVR Inc. (NVR), DR Horton (DHI), Lennar Corp (LEN), PulteGroup, Inc. (PHM)). However, in my opinion (also seen from the PEG ratio) the company has a larger and steeper growth potential ahead in comparison.

Data Source: Seeking Alpha

Source: Seeking Alpha

In the current market situation, I would consider a P/E of 10 to be a suitable multiple for a home builder. LGI Homes has a great growth potential ahead and current multiples offer a safe buying point for long term investors.

Conclusion

Down over 6% from a year ago for homes priced between $100,000 and $250,000, housing supply is worst on the low end of the home price range. Entry level homes are the speciality of LGI homes. With millennials increasingly moving to cities with cheaper housing and strong employment, LGI homes stands to benefit the most among other home builders. The correction in its stock price has provided a suitable entry point into at this time. With a price target of $140 (95% upside) and a timeframe of 3-4 years, I recommend LGIH to investors.

This article was written by

Hidden Opportunities profile picture
2.57K Followers
Venkat Raghavan is a management consultant and individual investor with experience providing transformation assistance to finance, healthcare and manufacturing industries. With a strong background in helping transform organizations and streamline their business, investing is a passion for the author, and he enjoys identifying undiscovered opportunities and sharing insights. The author aims to focus on companies with great potential that aren't under the spotlight.The author occasionally contributes articles to Rida Morwa's service High Dividend Opportunities.

Disclosure: I am/we are long LGIH. 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.

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