Wolfe Research maintained a Peerperform rating on shares of LGI Homes (NASDAQ:LGIH), following the company's latest housing closure report. LGI Homes disclosed a total of 579 housing closures for the month of September, marking a 7% year-over-year increase but revealing a 5% decline from August figures and falling short of Wolfe Research's expectation of 610 closures. The third-quarter closures stood at 1,757, consistent with the previous year's numbers but did not meet the consensus estimate of 1,894.
The report did highlight a positive aspect, noting a month-over-month increase in community count (CC) to 138 in September, up from 132, which suggests LGI Homes is on track to reach its year-end community count target of 150. Despite this, the absorption rate, which measures the pace at which available homes are sold, was 4.2 in September. This figure is significantly lower than the historical September average of 6.5 and has remained in the mid-4 range over the past four months.
Wolfe Research pointed out that the absorption pace might be perceived more favorably when considering that some new communities were opened later in the month. Adjusting for this, the absorption rate would be approximately 4.4, aligning with recent performance. Nevertheless, the stagnation in absorption pace is seen as disappointing, especially as mortgage rates have recently decreased. The report suggests that LGI Homes' target market, which is particularly sensitive to affordability issues, should have benefited more from the lower financing costs.
LGI Homes' performance is placed in context with that of other homebuilders, such as Lennar (NYSE:LEN) and KB Home (NYSE:KBH), which also reported order shortfalls in their fiscal third quarter. The report indicates that LGI Homes' results, while below expectations, are not surprising given the broader industry trends and the company's strategic focus on maintaining profit margins, in contrast to competitors like Lennar, which have made price concessions.
LGI Homes has seen a significant increase in both revenue and earnings per share for Q2 2024. The homebuilder delivered 1,655 homes, generating a revenue of over $602 million and marking an earnings per share of $2.48, a 10.2% increase from the same period in the previous year. In addition, LGI Homes' pretax net income stood at approximately $77 million, reflecting a pretax profit margin of 12.8%.
LGI Homes shares have been upgraded to Neutral by a Wedbush analyst, who sees the recent 12% decline in the company's share price as a potential opportunity. The analyst also noted a sequential improvement in the company's monthly absorption rates and a possible positive cash flow reversal.
Furthermore, LGI Homes is planning to expand its community count and adjust its average selling price and gross margin guidance upward. Despite these positive developments, the company acknowledges challenges with affordability in the housing market and potential downside risk for gross margins due to the high cost environment and mortgage incentives.
InvestingPro Insights
LGI Homes' recent performance can be further contextualized with data from InvestingPro. The company's market capitalization stands at $2.61 billion, with a price-to-earnings (P/E) ratio of 13.42, suggesting a relatively modest valuation compared to some peers in the homebuilding sector. This valuation aligns with the company's strategic focus on maintaining profit margins, as mentioned in the article.
InvestingPro Tips highlight that LGI Homes has been profitable over the last twelve months, with analysts predicting continued profitability this year. This positive outlook is particularly noteworthy given the challenges faced by the housing market, including affordability issues and fluctuating mortgage rates discussed in the article.
The company's strong return over the last three months, another InvestingPro Tip, is reflected in its 30.54% price total return over that period. This performance is impressive considering the absorption rate challenges and closure figures that fell short of expectations, as reported by Wolfe Research.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for LGI Homes, providing deeper insights into the company's financial health and market position.
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