lone star gems

Last week was no picnic for stocks. With oil prices continuing to implode and a rate hike looking more and more imminent, you’d think a Texas-based homebuilder would have dropped along with the rest of the market. Instead, LGI Homes (LGIH) rocketed from $19 to an all-time high above $24 after it demolished earnings expectations.

As they say in sports, that’s why you play the game.

I first visited LGI’s Woodland, Texas headquarters in March of 2014, a few months after its IPO. I came away quite impressed, and wrote about LGIH in June of that year. The company was at or near the top of all metrics for its industry: return on equity, return on assets, closings per active community, and revenue growth. What I found most attractive was its 26 percent gross margin at the time, a huge number in the homebuilding sector. I saw LGI as a great play on the ongoing “Texas economic miracle” and our new normal of zeroed out interest rates. Moreover, the company’s rapid growth and minimal Wall Street coverage made it look like a potential GARP goldmine. It took awhile, but I believe that thesis is finally bearing fruit.

Last week’s earnings report was spectacular. LGI’s gross margin is up to 28 percent now and the company’s EPS came in at .66 cents vs. estimates of .43 cents. It also raised its 2015 guidance. LGI now expects full year EPS of $2.15 to $2.50 and 3000 to 3300 homes sold, vs. earlier guidance of 2800-3200. Last year, it closed on 2356 homes vs. guidance of 2200. It had 1617 closings in 2013, which means it could easily double its sales in two years.

Even after its post-earnings rally, LGI still trades at a surprisingly low multiple compared to other homebuilders. That’s because the majority of its business is still in Texas, and the recent downturn in oil prices and announced oil industry layoffs has caused analysts to fear a slowdown in home sales there. Last week’s results show that these concerns were likely overblown. Unemployment in Texas remains well below the national rate, and the state’s economy is much more diversified now. Companies from all industries have relocated there for its low taxes, benign weather, family-friendly culture, and—that’s right—affordable real estate. LGI should continue to benefit from this trend. The average price of its homes is only about $180,000, below the national average of $240,00 and well below the crazy home prices on either coast.

Another thriving Texas-based homebuilder operating below Wall Street’s radar is Dallas-based Green Brick Partners (GRBK). Green Brick came public when the home development effort at New York hedge fund Greenlight Capital was merged into the public shell of a failed Colorado ethanol producer. Its CEO, Jim Brickman, is well respected and has been a home developer in north Texas for over three decades. The company’s stock rose from $1 to $8 in 2014, and is at $12 today. Green Brick does not offer revenue guidance. It did its first quarterly conference call in late 2014. Intriguingly, though, its two biggest shareholders—Greenlight Capital and Third Point Capital—both bought more shares in a recent secondary offering.

One thought on “lone star gems

  1. Michael Mussler

    Hi Scott: I just received your book from Amazon and on the dedication page I read your
    comment regarding people with “Special Needs.”
    My wife and I opened a 501 c 3 in support of families adopting children with Special Needs. We then opened a Boutique store – Tin Lilly with all volunteers and no – none- nada- paid personnel.
    Since opening the Charity last year, the dots continue to be connected. Your book is just another example. Please visit http://www.shoptinlilly.com and like us on Facebook. Every bit helps.
    Regards, Mike. PS: I showed my wife the book and dedication page — she cried at just the connection itself.


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