#Investment Thesis
We recommend a hold rating for LGIH with a target price of $95.48 for the following reasons:
- Seller's Market: The real estate market is currently a seller's market, so LGIH's value, being heavily tied to real estate, is likely in an expensive phase of the cycle.
- Long-term Potential: Despite the current high valuation, the closeness of the valuation to their actual price and their strong management suggest long-term sustainability.
#DCF – Terminal Growth
The Free Cash Flow (FCF) is calculated based on the assumptions that components of Non-Cash Net Working Capital remain steady as percentages of Revenue, COGS, and Operating Expenses, and that Capital Expenditures continue to grow in the short term before reducing back in the medium term.
- Current Market Price of LGIH is $98.93 per share, while the DCF model implies a value of $10 per share, suggesting the stock is overvalued by approximately 90%.
- Enterprise Value (EV) is $3,405 million, accounting for long-term debt and cash equivalents.
- The Cost of Equity is calculated at 11.88%, influenced by a risk-free rate of 2.38%, market risk premium of 7.0%, and an adjusted beta of 1.36.
- The WACC is 10.8%, indicating the overall discount rate used for future cash flows.
- Seller's Market: The real estate market is currently a seller’s market, so LGIH's value, being heavily tied to real estate, is likely in an expensive phase of the cycle.
- Long-term Potential: Despite the current high valuation, the closeness of the valuation to their actual price and their strong management suggest long-term sustainability.
DCF – Terminal Growth
The Free Cash Flow (FCF) is calculated based on the assumptions that components of Non-Cash Net Working Capital remain steady as percentages of Revenue, COGS, and Operating Expenses, and that Capital Expenditures continue to grow in the short term before reducing back in the medium term.
- Current Market Price of LGIH is $98.93 per share, while the DCF model implies a value of $10 per share, suggesting the stock is overvalued by approximately 90%
- Enterprise Value (EV) is $3,405 million, accounting for long-term debt and cash equivalents
- The Cost of Equity is calculated at 11.88%, influenced by a risk-free rate of 2.38%, market risk premium of 7.0%, and an adjusted beta of 1.36
- The WACC is 10.8%, indicating the overall discount rate used for future cash flows
#P/E Relative Valuation
The P/E relative valuation method compares LGIH's price-to-earnings ratio with that of its peers. This approach considers different market scenarios to provide a comprehensive view of the stock's potential valuation.
- Bear Scenario: EPS of 9.42 with a P/E ratio of 4.21 results in a price of $39.65, indicating a 59.9% undervaluation.
- Base Scenario: EPS of 18.04 with a P/E ratio of 5.48 results in a price of $99.92, indicating the current price is 1.0% overvalued.
- Bull Scenario: EPS of 25.00 with a P/E ratio of 6.50 results in a price of $167.38, indicating a potential 69.2% appreciation.
The weighted average price, considering 50% weight to the bear scenario, 30% to the base scenario, and 20% to the bull scenario, results in an implied price of $83.28, suggesting that the stock is currently overvalued by approximately 15.8%.
#EV/EBITDA Relative Valuation
The EV/EBITDA relative valuation method assesses LGIH's valuation by comparing its enterprise value to its EBITDA, relative to peers. This approach provides insight into the company's operational performance and market position.
- EV/EBITDA Multiple: The multiple used is 5.54, reflecting the industry standard and LGIH's market positioning.
- Growth Premium: A growth premium of 1.00% is applied, accounting for LGIH's growth potential and market conditions.
- Enterprise Value (EV): Calculated EV is $3,093.63 million based on the EBITDA of 553 and the multiple.
- Implied Share Price: The implied share price from this valuation method is $125.72, indicating a 27.1% undervaluation compared to the current price of $98.93.
#Revenue Price Model
The Revenue Price Model valuation method assesses LGIH's value by analyzing the revenue generated per home and the number of homes ordered.
- Average Revenue per Home: $300,575
- Net Orders Homes: 9,085 homes
- Revenue: $2,731 million
- Revenue/Price Model Coefficient: 0.056559
- Revenue/Price Model Intercept: (30.889805)
- Implied Share Price: $123.56, indicating that LGIH stock is 24.90% undervalued compared to the current price of $98.93.
#Tools and Skills Used
- Financial Modeling: Developed and analyzed Discounted Cash Flow (DCF) models, Price/Earnings (P/E) relative valuations, EV/EBITDA models, and Revenue Price Valuation models to derive accurate valuations for LGI Homes Inc.
- Data Analysis: Conducted regression analysis to project revenue growth, evaluate market trends, and determine the impact of various economic factors on LGI Homes financial performance.
- Market Research: Performed in-depth market and competitive analysis to understand the real estate market dynamics and position LGI Homes within the industry.
- Strategic Planning: Evaluated and articulated LGI Homes strategic initiatives, including growth strategies, market expansion, and risk management approaches.
- Report Writing: Compiled comprehensive investment reports with clear, data-driven recommendations for LGI Homes, ensuring stakeholders are well-informed.
- Presentation Skills: Created compelling visualizations and summaries to effectively communicate findings and strategic insights to stakeholders.
- Software: Excel, Google Sheets, Bloomberg Terminal, Python for regression analysis and financial modeling.