Weekly Equity Idea Highlight - 2018 01 24
Current market expectations for LGIH are overly pessimistic. Markets expect UAFRS-based (Uniform) ROA to decline significantly with Asset' growth also slowing dramatically. However, the company has seen fundamentals improving, implying the market is being too pessimistic. Also, the company is seeing a positive age-wave related macro-trend likely driving fundamentals and sustained growth, thanks to more millennials beginning to buy starter-homes, an area they are focusing in. All these factors point to fundamental improvements for the business the market is not pricing in.Also, management alignment point to reasons to believe in further operational improvement. Management is specifically compensated to focus on growth and margin improvement, the two key drivers of operational improvement for this business, which should drive returns to sustain and growth to be robust, contrary to market expectations. Also, while management has grown less constructive about their growth drivers going forward, with market expectations already for dramatically slowing growth and declining returns, management's lack of significant operational concerns points to reason for continued optimism.
Considering low market expectations, in terms of pessimism for both growth and Uniform ROA, positive tailwinds and management's alignment focused on improving fundamentals for the business, current low equity valuations appear unreasonable, spelling potential for equity upside.
LGI Homes is a holding company. Through its subsidiaries, the company is engaged in the design, construction, and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, South Carolina, North Carolina, Colorado, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon, and Nevada. The company's product offerings include entry-level homes, including both detached homes and townhomes, and move-up homes sold, which are sold under its LGI Homes brand, and its luxury series homes, which are sold under its Terrata Homes brand. The company's homebuilding operations are organized and managed by seven divisions: West, Northwest, Central, Midwest, Florida, Southeast and Mid-Atlantic.
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