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Is LGI Homes the Next Big Homebuilder?

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LGI Homes  (NASDAQ: LGIH  ) is confident about more than just the housing market's current sales conditions, future market trends, and potential buyer traffic. With its IPO in November and the release of positive third-quarter earnings this past week, LGI Homes is confident about its approach to finding homebuyers and encouraging them to purchase a new home. Although the company may be much smaller than its competitors, it's making a big impression. Let's investigate why.

Small but mighty
LGI Homes is more than your average homebuilding company – it's a marketing firm and a homebuilder in one. For its IPO on Nov. 7, LGI Homes priced shares at $11 apiece. As of Dec. 19, the company stock was up 63% to 64% and trading at $17.98 per share.

This week, share prices jumped 1% as a result of the company's solid performance in its third quarter earnings report that was released on Dec. 17. Home sale revenues soared 58.4% from same quarter of last year to $68 million. The average home price also increased to $151,779, as the number of homes purchased jumped 40% from 320 to 448 homes – the most homes sold in one quarter in the company's history.  

Its all about making a sale
Unlike other homebuilders, which wait for potential customers to approach them, LGI Homes takes a more forward approach by distributing pieces of information on how a home purchase can be made affordable by choosing LGI Homes to do the construction.  LGI Homes advises current renters and first-time homebuyers on their options, to help them see that they can afford a home despite their uncertainties. By incorporating this sales approach into its niche for construction and homebuilding, LGI Homes has managed to expand company operations from areas in Georgia to parts of Arizona and numerous points in between (though the company remains primarily in the southern United States.) 

Unwilling to be intimidated
LGI Homes has proven that it's not afraid of the competition among homebuilders. Through its innovative sales strategy, LGI Homes is determined to outplay its competitors PulteGroup,  (NYSE: PHM  ) and DR Horton  (NYSE: DHI  ) . Given the relative sizes of the three companies, this is very much a case of David versus Goliath.

Detailed in the chart below is the year-over-year growth rate for all three companies between 2011 and 2012. LGI Homes surprisingly had the largest growth rate of 49.8%. This is further evidence that the company has a successful strategy for increasing home sales and is rapidly expanding. D.R. Horton is not far behind, with a year-over-year growth rate of nearly 44%. PulteGroup, on the other hand, may need to rethink its business strategy and adopt one closer to that of LGI Homes if it wants to hold its position in the housing market.

Company Name

YoY Growth

LGI Homes, 




DR Horton


Despite its many strengths, LGI Homes faces several challenges going forward, since it operates in an environment with few barriers to entry, competing against a large supply of both national and regional homebuilding companies who have a greater geographic presence.  

As the company stated in its IPO prospectus, "Many of our competitors may also have longer operating histories and long-standing relationships with subcontractors and suppliers in the markets in which we operate. This may give our competitors an advantage in marketing their products, securing materials and labor at lower prices and allowing their homes to be delivered to customers more quickly and at more favorable prices".  

But aside from these obstacles, LGI Homes has lots of room to expand operations both nationally and internationally. 

Foolish takeaway
Foolish investors would be wise to keep their eye on LGI Homes and its performance over the next several quarters. Take the time to research LGI Homes and its competitors before making any sudden moves. Following its recent third-quarter earnings results and its year-over-year growth for the past two fiscal years, LGI Homes is definitely worth a closer look by investors.

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Related Tickers

5/27/2016 4:02 PM
DHI $30.58 Down -0.01 -0.03%
D.R. Horton, Inc. CAPS Rating: ***
LGIH $27.06 Up +0.23 +0.86%
LGI HOMES INC CAPS Rating: *****
PHM $18.86 Down +0.00 +0.00%
PulteGroup, Inc. CAPS Rating: ***