On Friday, Wolfe Research maintained its Peerperform rating on shares of LGI Homes (NASDAQ:LGIH). The firm's stance reflects a cautious outlook due to the current reduced affordability in the housing market, which significantly affects LGI Homes' core customer base. LGI Homes' stock is currently trading at a valuation that is below the historical average for the industry.
The research note highlighted that LGI Homes is trading at 1.0 times the firm's 2024 book value estimate. This valuation marks a substantial discount compared to the mid-point historical average of 2.0 times. Wolfe Research's analysis suggests that a 6.3% return on assets (ROA) projection for LGI Homes in 2024 would typically warrant a 1.3 times book value multiple for small to mid-cap builders.
Despite the attractive valuation in comparison to historical figures, Wolfe Research opts for a neutral position on the equity. The firm cites concerns over the impact of a challenging affordability environment on LGI Homes' payment-sensitive customer segment. Additionally, Wolfe Research notes that LGI Homes' leverage is higher than that of its peers, which adds to the rationale behind the decision to not change the rating.
LGI Homes specializes in constructing homes that cater to first-time and entry-level buyers, a demographic particularly sensitive to changes in affordability. The housing market has been experiencing a squeeze on affordability due to rising mortgage rates and sustained price increases, which can dampen demand among potential buyers.
The Peerperform rating indicates that Wolfe Research expects LGI Homes' stock to perform in line with the stocks of other companies in the sector. This outlook is based on the analysis of the company's financials and market position relative to industry peers and broader economic factors affecting the housing market.
In other recent news, LGI Homes has reported robust first-quarter results for 2024, with a significant increase in home deliveries, revenue, and gross margins. The company delivered 1,083 homes at an average sales price above $360,000, resulting in total revenues of $391 million. LGI Homes' gross margin for the quarter was 23.4%, with an adjusted gross margin of 25.3%, marking an improvement from the previous year.
The company also expanded its active communities by 21% from the previous year, totaling 120. This strategic expansion is part of LGI Homes' growth trajectory, with an aim to close between 7,000 and 8,000 homes for the full year at an average selling price ranging from $350,000 to $360,000.
These recent developments show a positive trend in sales and leads, particularly in February and March, contributing to an increase in net orders and backlog. LGI Homes expects to maintain historical gross margins and is on track to reach its target of 150 communities by the end of the year, despite anticipating a rise in advertising costs. The company continues to selectively purchase land for development across the United States, indicating a strong demand for LGI Homes.
InvestingPro Insights
In light of Wolfe Research's Peerperform rating for LGI Homes (NASDAQ:LGIH), a closer look at the company's financials and stock performance through InvestingPro's lens offers additional insights. LGI Homes' market capitalization currently stands at approximately $2.08 billion, and the stock is trading at a price-to-earnings (P/E) ratio of 11.1, which is below the adjusted P/E ratio for the last twelve months as of Q1 2024, indicating a potentially undervalued stock. Additionally, the company's revenue growth remains modest at 0.73% over the last twelve months as of Q1 2024.
Moreover, InvestingPro Tips suggest that while LGI Homes operates with a significant debt burden, analysts have revised their earnings upwards for the upcoming period, providing a positive outlook on profitability. Furthermore, the company's liquid assets exceed its short-term obligations, which could indicate a stable financial position in the near term. These factors, combined with the fact that LGI Homes is trading near its 52-week low and has experienced considerable price volatility, may present a unique opportunity for investors.
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