LGI Homes (LGIH)

Affordable single-family home construction company LGI Homes (NASDAQ:LGIH) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 10.1% year on year to $351.4 million. Its GAAP profit of $0.17 per share was 73.1% below 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).

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, LGI Homes’s sales grew at a sluggish 1.5% compounded annual growth rate over the last five years. This fell short of our benchmarks and is a poor baseline for our analysis.

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 performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 1.9% annually.

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 $406.2 million in the latest quarter and averaged 4.9% 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 10.1% year-on-year revenue decline, generating $351.4 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 10.9% over the next 12 months, an improvement versus the last two years. This projection is healthy and indicates its newer products and services will spur better top-line performance.

At StockStory, we prefer high gross margin businesses because they indicate the company has pricing power or differentiated products, giving it a chance to generate higher operating profits.

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 25.8% gross margin over the last five years. That means LGI Homes paid its suppliers a lot of money ($74.25 for every $100 in revenue) to run its business.

This quarter, LGI Homes’s gross profit margin was 21%, marking a 2.6 percentage point decrease from 23.6% in the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

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 13.9%. 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 7.6 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, LGI Homes’s breakeven margin was down 4.7 percentage points year on year. Since LGI Homes’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

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.

LGI Homes’s flat EPS over the last five years was below its 1.5% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

Diving into the nuances of LGI Homes’s earnings can give us a better understanding of its performance. As we mentioned earlier, LGI Homes’s operating margin declined by 7.6 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses 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 18.4% show its recent history was to blame for its underperformance over the last five years. These results were bad no matter how you slice the data.

In Q1, LGI Homes reported EPS at $0.17, down from $0.72 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects LGI Homes’s full-year EPS of $7.76 to stay about the same.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

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 3.5%, meaning it lit $3.51 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 9.9 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? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although LGI Homes hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it historically found a few growth initiatives that worked. Its five-year average ROIC was 12.5%, higher than most industrials businesses.

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. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

LGI Homes’s $3.25 billion of debt exceeds the $57.6 million of cash on its balance sheet. Furthermore, its 16× net-debt-to-EBITDA ratio (based on its EBITDA of $196 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. LGI Homes could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope LGI Homes can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We struggled to find many positives in these results. Its revenue missed significantly and its EPS fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 1.6% to $58.26 immediately following the results.

Updated: May 21, 2025 at 11:43 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own LGI Homes, you should also grasp the company’s longer-term business quality and valuation.

LGI Homes falls short of our quality standards. To begin with, its revenue growth was weak over the last five years. And while its strong operating margins show it’s a well-run business, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its projected EPS for the next year is lacking.

LGI Homes’s P/E ratio based on the next 12 months is 6.8x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $97.33 on the company (compared to the current share price of $52.56).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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