New to the stock market in November,LGI Homes (
) is being regarded by investors and analysts as a housing
market play with a unique twist.
The homebuilder, based in the Woodlands, north of Houston,
takes a sales-oriented approach to acquiring first-time
homebuyers, contacting renters and other prospects with
information on how they can afford a home. This helps it stand
out from the pack.
LGI stock has surged 57% from its Nov. 7 IPO at $11 a share.
It was up about 3% this week by the time the firm released
third-quarter results Tuesday night. The stock flagged early
Wednesday, then rebounded to close up 0.7% at 17.30.
In its report for the quarter, LGI said home sales revenue
rose 58% from a year earlier to $68 million, amid expansion into
new markets, and the average home sales price went up 13% to
$151,779. JMP Securities analyst Peter Martin had cited expected
revenue of $68 million in his Dec. 2 report on the company.
"We closed 448 homes during the quarter, resulting in the best
quarter in company history," said LGI CEO Eric Lipar on the
earnings conference call. "We ended the quarter with a portfolio
of approximately 11,000 lots (finished and raw land) that we own
LGI started building in Texas in 2003 and has expanded into
Florida, Arizona, Georgia and New Mexico. Lipar said on the call
that its markets are still seeing "strong momentum in housing
With double or triple-digit year-over-year earnings and
revenue growth for several quarters, LGI holds the top Composite
Rating in IBD's Building-Residential/Commercial industry group.
It's a smaller builder in market cap among 26 names. The largest
), which reported earnings early Wednesday, thenPulte (
),D.R. Horton (
) andToll Bros. (
The group ranks No. 182 of 197 that IBD tracks. But it jumped
3% Wednesday as stocks broadly lifted on economic confidence
brought by the Fed's word that it will start slowly tapering bond
The Federal Open Market Committee said, though, that its
"sizable and still-increasing holdings of longer-term securities
should maintain downward pressure on longer-term interest rates,
support mortgage markets, and help to make broader financial
conditions more accommodative."
LGI's competitors include D.R. Horton, Fulton Homes, Crown
Communities, Chesmar, First Texas and Highland Homes.
"The company's strength is its sales model. They really
differentiate themselves most by the way they market to the
first-time homebuyer," Martin said. "Those marketing strategies
have allowed them to achieve record sales metrics."
Hands-On With Homebuyers
LGI direct-mail campaigns target renters and show how they can
buy homes with an affordable mortgage. The program has worked
very well, resulting in more than triple the industry's average
monthly sales per community. At the end of the last quarter, LGI
was selling an average of seven homes a month per community, vs.
the industry's two.
"The traditional builder has always opened up the model home
and provided a couple of salespeople and used traditional methods
of marketing," Martin said. "I think the most innovative thing
the homebuilding industry has done is gone to social media and
some things on the Internet, but it's always advertise and have
them come by your model home."
LGI sends out about 12,000 direct mailings each week to
renters within 25 miles of LGI's targeted communities. It also
uses traditional advertising and social media.
Once potential buyers are interested, LGI's salespeople will
book weekend appointments to spend about two hours going over
homes and how to buy. As a result of this smooth and efficient
process, LGI has been able to achieve a high close rate, writes
Martin in his research report. Only about 10% of the closings
take place with Realtors.
LGI tries to "have personal contact with that potential
customer to learn about what they need, what they can afford,
before they even show them the product," he added.
In addition to LGI's targeted marketing, the company has also
mastered cost efficiencies in the way it builds and sells its
homes. It usually offers no more than five unique home models and
incorporates many upgrades that would otherwise be custom work by
other builders. This translates to lower labor, design and
construction costs, thereby assuring that LGI has
It usually focuses on high-growth markets and communities
slightly outside of metropolitan areas, yet still close to
businesses. This is where land-acquisition savings come in. LGI
also selects areas that qualify for various federal and state
housing programs, adding appeal for first-time buyers in that
demographic. The company has 22 active communities and Martin
expects that to double by the end of 2015.
LGI gave an outlook in its third-quarter report saying that it
expects to have at least 24 active selling communities at the end
of this year and 36 in 2014. It expects to close more than 420
homes in the fourth quarter and 2,000 next year.
LGI's homes are exclusively built on spec, meaning that at any
given time in the sales process, several are already built and
available. Once LGI sells a home, it immediately starts building
"They really spend a lot of time upfront with the customer,
which makes the sales process more efficient," Martin said.
"Because they already have homes built and ready ... if that
customer qualifies and has ability to get a loan, then they can
go look at the product and decide that they can buy."
Efficient construction plus a sound strategy of buying land
translates into a strong growth rate and profitable business. LGI
commands gross margins of 27% or higher, above the industry
average of 20%.
Along with the five states where LGI is active now, Martin
anticipates it will venture into Nevada, Colorado and the
Carolinas. The recent IPO raised nearly $103 million, giving LGI
room for land acquisition and expansion into new states.
"The company has a proven process and development plan," noted
Martin. "They just needed the proceeds from the IPO to grow the
company and we expect deliveries to double between 2013 and
LGI has below-industry debt levels, but analysts expect it to
slightly increase to partially fuel its strong expansion in the
Risks include the typical interest-rate risk, as rising rates
could curb buyer demand. Changes in government-sponsored housing
programs also could affect affordability.
Martin notes that currently rent prices are high, making it
easy to sell homes to renters. If rent prices were to go down,
the competitive advantage may not be as apparent.
Labor, material and other costs are always a factor for
builders too, plus the overall cyclicality of the industry.
However, builders recently came out with very strong confidence
numbers for their industry.
LGI's Lipar and his father have been involved in land
development since the mid-1990s and with the company since
"Eric Lipar is a very driven individual. He's really the
energy behind this sales model and he has grown this business
with the help of several other key members," Martin said. "He
ended up supplementing that management team over the last 12 to
14 months in anticipation of the growth in the new states."
The team is "pretty well set" to handle the growth ahead, he
The consensus view of analysts polled by Thomson Reuters is
for revenue of $62 million in the fourth quarter and $225.9
million for the year, then $342.5 million in 2014.