Unfortunately, the timing of this deal seems to be off the mark.
First, though, some background on the company. Founded in 2003, LGI focuses on entry-level homes in Texas, Arizona, Florida and Georgia. The price for a home ranges from $115,000 to $260,000, with the square footage ranging from 1,200 to 3,000. In all, the company has sold over 5,000 homes and has been profitable every year — an impressive track record in light of the plunge in the real estate market from 2006 to 2011.
Of course, the big driver of the company lately has been the sudden growth in the housing market. As real estate recovered, revenue took off. From 2010 to 2012, revenue jumped from $55.3 million to $143.4 million — good for a compound annual growth rate north of 60%.
Considering LGI Homes has built a platform that focuses on realizing efficiencies, though, its success — even in tough times — is not necessarily surprising. The company works hard to improve build times, closing percentages, inventory turnover and capital allocation.
Plus, it’s also been innovative with its marketing strategies. For example, LGI has an effective program to target local renters and to communicate the benefits of home ownership.
Another thing to like about LGI Homes: Going forward, it has plenty of supply. The company owns about 10,000 lots, which should provide enough inventory for over seven years. Plus, the land holdings are in areas that have strong population and employment growth, along with favorable migration patterns.
While those details are nice, though, they’re really just noise right now. Sadly, the only thing that will probably matter is the fact that homebuilder IPOs are out-of-favor right now, despite the rebound in the real estate market. For the year so far, three deals have hit the market: Tri Pointe Homes (TPH), Taylor Morrison Home Corp. (TMHC) and William Lyon Homes (WLH).
All are currently trading below their offering prices.
It looks like investors are concerned about rising interest rates, which may not only reduce some home-buying demand but could also make it tougher for homebuilders to get affordable financing. What’s more, thomebuilder stocks already staged a huge rally last year, which stretched the valuations.
In light of this, a transaction for LGI Homes could be tough to pull off — at least at an attractive market cap.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.