I last did a “don’t miss the forest for the trees” post on Big Lots. That company went on to rally from when I posted it (not because of me, but because the reaction was way too negative). Unfortunately, supply chain concerns have created new pressures on BIG. In a similar vein, supply concerns are now pressuring LGIH stock, but I remain unfazed and take comfort in the long-term story.
LGIH just posted September home closings were 793 vs. 811 last year, which is a miss for a company “growth” company and I believe this is below expectations. They didn’t report earnings, but investors closely watch these reports for signals of how the quarter will shape up.
We’ve seen other builders also lower their guidance already:
- Pulte (PHM) lowered closings 6%
- DR Horton (DHI) lowered closings 9%, but raised GM target, so net / net EPS impact was margins
- Lennar (LEN) lowered closings 5%
- KB Homes missed closings by 7%
- Hovnanian just lowered guidance for closings and lowered EBITDA expectations (see yellow line below).
So clearly the homebuilders are all aligned here.
But you need to understand why they are all guiding down: tight supply. To me, this firms the thesis.
LGIH is a largely spec builder at really attractive price points. While they are selling lots very quickly and now need to reinvest, I am comfortable that this model will continue to do very well in the long run. Absorptions are still running at 7.7 (compared to average pace of 6.5) so again, this isn’t really a demand issue, but more so a supply problem. I like it when demand outstrips supply.
Interest rates have also increased modestly, so can’t help but think that is pressuring the stock. That could have a severe impact on the price, but again, I’d likely be unfazed given the long-run story here.
At ~8x forward PE and 2x TBV, I also think valuation is undemanding (DHI trades at 1.6x TBV).