Expanding Communities By 29% Will Provide Additional Income Streams

Key Takeaways

• Record-setting community expansion and land investment support future growth, enhancing revenue and long-term profitability.
  
• Focus on recruitment, targeted marketing, and self-development improves operational efficiency and margins, sustaining healthy earnings despite affordability challenges.
  
• Rising mortgage rates and increased costs could challenge LGI Homes' profitability and revenue, while their reliance on incentives may impact net margins.
  

Catalysts

Engages in the design, construction, and sales of homes.

• The expansion of community count by 29% to a record-breaking 151 active communities is expected to drive future revenue growth as more communities provide additional income streams.
  
• Continued investment in land and inventory aims to support affordability and sustain future growth, which could positively impact long-term revenue and profitability.
  
• The strategic focus on recruiting and training new teams for the additional communities is expected to boost operational efficiency, potentially improving net margins.
  
• The emphasis on targeted marketing and managing costs, alongside offering incentives, aims to mitigate affordability challenges and sustain sales volumes, aiding in maintaining healthy earnings.
  
• LGI Homes' ability to self-develop projects, capturing developer profit, allows for higher margins even with incentives, which could incrementally improve their adjusted gross margin.

LGI Homes Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LGI Homes's revenue will grow by 14.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.9% today to 7.9% in 3 years time.
• Analysts expect earnings to reach $263.2 million (and earnings per share of $10.92) by about March 2028, up from $196.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.1x on those 2028 earnings, up from 8.6x today. This future PE is greater than the current PE for the US Consumer Durables industry at 10.2x.
• Analysts expect the number of shares outstanding to decline by 0.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.83%, as per the Simply Wall St company report.

LGI Homes Future Earnings Per Share Growth

Risks

• Rising mortgage rates have led to decreased affordability for potential buyers, which could negatively impact revenue as fewer homes might be sold.
  
• The company is facing increased input costs, including labor and materials, which may constrain profit margins if these costs cannot be passed on to consumers.
  
• SG&A expenses have risen due to higher advertising and personnel costs, impacting net margins and overall profitability.
  
• A significant portion of their strategy relies on incentives to attract buyers, which could erode net margins if not properly managed.
  
• The market environment remains uncertain, with higher debt levels and sensitivity to interest rates, potentially affecting earnings and financial flexibility.

Valuation

• The analysts have a consensus price target of $106.667 for LGI Homes based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $140.0, and the most bearish reporting a price target of just $65.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.3 billion, earnings will come to $263.2 million, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 10.8%.
• Given the current share price of $72.32, the analyst price target of $106.67 is 32.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.