LGI Homes (LGIH)

Affordable single-family home construction company LGI Homes (NASDAQ:LGIH) missed Wall Street’s revenue expectations in Q4 CY2025, with sales falling 15% year on year to $474 million. Its non-GAAP profit of $0.97 per share was 6.2% above analysts’ consensus estimates.

Company Overview

Based in Texas, LGI Homes (NASDAQ:LGIH) is a homebuilding company specializing in constructing affordable, entry-level single-family homes in desirable communities across the United States.

Traditionally, homebuilders have built competitive advantages with economies of scale that lead to advantaged purchasing and brand recognition among consumers. Aesthetic trends have always been important in the space, but more recently, energy efficiency and conservation are driving innovation. However, these companies are still at the whim of the macro, specifically interest rates that heavily impact new and existing home sales. In fact, homebuilders are one of the most cyclical subsectors within industrials.

Competitors in the residential home construction sector include D.R. Horton (NYSE:DHI), PulteGroup (NYSE:PHM), and Meritage Homes (NYSE:MTH).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, LGI Homes’s demand was weak and its revenue declined by 6.4% per year. This wasn’t a great result and suggests it’s a low quality business.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. LGI Homes’s recent performance shows its demand remained suppressed as its revenue has declined by 15% annually over the last two years.

We can better understand the company’s revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. LGI Homes’s backlog reached $501.3 million in the latest quarter and averaged 14.6% year-on-year growth over the last two years. Because this number is better than its revenue growth, we can see the company accumulated more orders than it could fulfill and deferred revenue to the future. This could imply elevated demand for LGI Homes’s products and services but raises concerns about capacity constraints.

This quarter, LGI Homes missed Wall Street’s estimates and reported a rather uninspiring 15% year-on-year revenue decline, generating $474 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 4.5% over the next 12 months. While this projection implies its newer products and services will spur better top-line performance, it is still below average for the sector.

LGI Homes has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 25.1% gross margin over the last five years. Said differently, LGI Homes had to pay a chunky $74.88 to its suppliers for every $100 in revenue.

LGI Homes produced a 17.7% gross profit margin in Q4, down 5.3 percentage points year on year. LGI Homes’s full-year margin has also been trending down over the past 12 months, decreasing by 3.5 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

LGI Homes has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 12.6%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, LGI Homes’s operating margin decreased by 13.3 percentage points over the last five years. Even though its historical margin was healthy, shareholders will want to see LGI Homes become more profitable in the future.

In Q4, LGI Homes generated an operating margin profit margin of 3.9%, down 4.3 percentage points year on year. Since LGI Homes’s gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, R&D, and administrative overhead expenses.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for LGI Homes, its EPS declined by 21.9% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

We can take a deeper look into LGI Homes’s earnings to better understand the drivers of its performance. As we mentioned earlier, LGI Homes’s operating margin declined by 13.3 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For LGI Homes, its two-year annual EPS declines of 36.9% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q4, LGI Homes reported adjusted EPS of $0.97, down from $2.15 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 6.2%. Over the next 12 months, Wall Street expects LGI Homes’s full-year EPS of $3.35 to grow 29%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

LGI Homes’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 7%, meaning it lit $7.03 of cash on fire for every $100 in revenue. This is a stark contrast from its operating margin, and its investments in working capital/capital expenditures are the primary culprit.

Taking a step back, we can see that LGI Homes’s margin dropped by 22.9 percentage points during that time. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

LGI Homes historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9.2%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, LGI Homes’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

It was good to see LGI Homes beat analysts’ EPS expectations this quarter. On the other hand, its revenue slightly missed. Overall, this quarter could have been better. The stock traded down 3.1% to $58.95 immediately after reporting.

Updated: February 17, 2026 at 8:09 AM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

LGI Homes doesn’t pass our quality test. To kick things off, its revenue has declined over the last five years. While its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its declining EPS over the last five years makes it a less attractive asset to the public markets.

LGI Homes’s forward price-to-sales ratio is 0x. The market typically values companies like LGI Homes based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy.

Wall Street analysts have a consensus one-year price target of $67.50 on the company (compared to the current share price of $58.95).