Look, it's no secret that the housing market is booming right now, and that many homebuilders are doing quite well. But even with this backdrop, it's still astounding that LGI Homes (NASDAQ:LGIH) has been able to put up the numbers that it has recently. Forget double-digit growth -- LGI was able to grow revenue by a staggering 72% compared to this time last year.
Numbers like that one are hard to replicate in such a cyclical and capital-intense business like homebuilding. But this isn't the first time that LGI has been able to post these kinds of results. Was this just a fluke or a sign of things to come in 2018 -- and perhaps beyond? Let's take a deeper look at the company's most recent earnings results to see what kind of growth we can expect, and what that may mean for investors.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||$279.0 million||$404.9 million||$162.9 million|
|Operating income||$30.8 million||$54.7 million||$16.1 million|
|Net income||$27.3 million||$35.6 million||$11.8 million|
The first quarter is typically one of LGI's weakest quarters, but it was hard to notice weakness in this past quarter. New home closings increased 63%, while the average home price increased 4.8% to $224,300. LGI's average selling price is well below that of many of its peers. This is by design, though, as LGI focuses on building more no-frills, limited-options houses geared to get renters to buy their first place.
Despite the much lower price point, LGI has been able to maintain high margins. This past quarter, its gross margin on homes sold was 24.8%, which puts it at the higher end of homebuilders in terms of profitability. Toss in a more beneficial tax rate, and LGI was able to more than double its net income.
Texas is LGI's home base and has long been the most significant part of the business. But it's encouraging that growth in its other markets is doing just as well, adding some much-needed geographic diversity to its sales mix. Having a more geographically diverse footprint will help the company better handle a swoon in any one particular market.
What management had to say
LGI's sale growth isn't anything new. The company has grown its annual home closings by more than 10 times this decade. According to CEO Eric Lipar, that won't be slowing down anytime soon, as management prepares to enter several new markets in the coming months:
The second quarter is off to a great start with 606 closings in April, up 66% from the 365 closings in April of last year. The 606 closings came from 79 active communities, resulting in a very solid absorption pace, averaging just over 7.7 closings per community per month.
We are also continuing our nationwide expansion focusing on increasing our community count. As previously discussed, we believe we are on track to end the year between 85 and 90 active communities. We have started construction in our first communities in the Sacramento, California, and Birmingham, Alabama, markets. Both of these projects will start sales later this quarter, with closings expected in the third quarter of this year.
We also have closed on our first project in Las Vegas. Construction and sales will begin later this year, with closings expected in the fourth quarter of this year, or the first quarter of next year.
Besides the three markets mentioned here, LGI is currently working to add communities in Oklahoma City; Minneapolis; Portland, Oregon; Nashville, Tennessee; and Winston-Salem and Raleigh, North Carolina.
Geared to grow
To chalk up LGI's recent success to the booming housing market doesn't really give management the credit it deserves. Sure, the housing market is good right now. But LGI's growth is leaps and bounds better than many of its peers. And it is generating margins similar to those of much bigger homebuilders, which enjoy the benefits of scale. Even more impressive is that almost all of LGI's home offerings are at much lower price points than its peers offer, as it specifically targets first-time home buyers. Typically, lower price points mean lower margins, but that hasn't been the case with LGI so far.
If there is a real concern with LGI Homes' business, it's that its capital structure is such that it has to keep growing like this or it could get into trouble. It carries a relatively high debt-to-capital ratio (52%), and it doesn't carry a lot of cash on the balance sheet to provide a cushion in the event of an industry downturn. As long as it can maintain growth, this isn't a huge concern. But it's worth keeping an eye on when the next downturn inevitably comes.
With all those additional communities Lipar mentioned, LGI is guiding for 6,000 to 7,000 homes sold in 2018. That is a significant gain compared to the 5,800 or so that were closed in 2017, and it shows that there is still plenty of room for LGI to grow. With homebuyer demographics clearly on its side, there's reason to believe that LGI should be able to keep this performance up for a while.