Upcoming Community Expansions And Land Development Will Strengthen Future Earnings

Key Takeaways

• Strategic land acquisitions and disciplined development plans bolster future revenue potential and sustain strong net margins.
  
• Expanding community count and maintaining high sales prices support long-term revenue growth and improved earnings.
  
• LGI Homes' focus on long-term profitability over immediate growth may pressure cash flow, margins, and earnings due to affordability challenges, high costs, and variable debt.

Catalysts

Designs, constructs, and sells homes.

• LGI Homes has significantly expanded its community count, with plans for continued growth in 2025. This expansion is likely to enhance future revenue streams as more communities become active.
  
• The company has made strategic land acquisitions and developments that provide substantial inherent value. This disciplined approach aims to sustain strong net margins over time by avoiding aggressive price reductions.
  
• LGI Homes is focusing on maintaining high average sales prices and managing price incentives to sustain profitability, which could lead to improved earnings.
  
• The company’s significant land portfolio and controlled lot positions offer potential for future development, likely boosting long-term revenue and supporting earnings growth.
  
• LGI Homes’ pipeline of new community openings and planned growth suggest a robust revenue outlook, with expectations for increased unit closings and enhanced earnings moving forward.

LGI Homes Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LGI Homes's revenue will grow by 18.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 9.6% in 3 years time.
• Analysts expect earnings to reach $357.2 million (and earnings per share of $14.9) by about December 2027, up from $197.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.0x on those 2027 earnings, down from 12.5x today. This future PE is lower than the current PE for the US Consumer Durables industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 0.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.57%, as per the Simply Wall St company report.

LGI Homes Future Earnings Per Share Growth

Risks

• LGI Homes is focusing on long-term profitability over immediate pace, which could limit revenue growth if housing demand remains strong. This approach may also pressure short-term cash flow as fewer homes are sold quickly at potentially lower margins.
  
• The company faces affordability challenges due to higher home prices and interest rates, which could restrict the customer base and suppress revenue and sales volume growth in the near term.
  
• A significant portion of LGI's land investment is not yet generating revenue, which could strain ROE and earnings until these developments are monetized through increased home sales.
  
• The elevated cost of land development and rising SG&A expenses as a percentage of revenue, particularly due to increased advertising and new community openings, could compress net margins and limit profitability.
  
• The increased reliance on variable-rate debt could heighten interest expense, affecting net income margins, especially if interest rates remain high or increase further, impacting overall earnings.

Valuation

• The analysts have a consensus price target of $117.5 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 $160.0, and the most bearish reporting a price target of just $85.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.7 billion, earnings will come to $357.2 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 9.6%.
• Given the current share price of $104.51, the analyst's price target of $117.5 is 11.1% 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.