Investor Essentials Daily

Credit markets still think LGI Homes’ debt is a house of cards waiting to collapse

LGI Homes, Inc. (LGIH)
May 18, 2022

In the past few years, one of our favorite stocks was LGI Homes (LGIH) because of booming tailwinds in the housing industry. It was a darling stock as it rode massive industry growth to reach new heights in its business.

Last year, we stopped recommending the equity as it has finally reached fair value in our view, but it appears the company’s debt is still being misunderstood by the ratings agencies. They seem to once again be missing the strength and breadth of LGI Homes’ cash-generating ability, as they still see the company at a high risk of bankruptcy.

However, we can use Uniform Accounting to put the company’s real profitability up against its obligations and decide for ourselves the true risk of this business.

Also below, a detailed Uniform Accounting tearsheet of the company.

Investor Essentials Daily:
Wednesday Credit Insights
Powered by Valens Research

One of our favorite stock picks through the middle of 2021 was LGI Homes (LGIH).

It experienced rapid stock appreciation as the booming demand for homes combined with its company-specific growth tailwinds of management grew the business into new, higher-demand regions.

We stopped recommending the company because the stock became fully valued, as the market realized just how great of a company it was.

As the saying goes though, all good things come to an end.

Or so we thought.

Apparently, the credit ratings agencies have completely missed LGI Homes’ huge run of cash flows and growth throughout the housing boom of 2020 and beyond.

With a high yield (BB-) rating and a 10% risk of default, credit markets continue to think LGI Homes is as safe as a shack in a tornado.

Instead, the company’s impressive cash scale and cash flow generation, alongside continued booming macroeconomic tailwinds, say it’s more like a tornado shelter.

For these reasons, LGI Homes’ Credit Cash Flow Prime (CCFP) is way healthier than the market is thinking.

We can figure out if there is a real risk for this high-potential company by leveraging the CCFP to understand the company’s obligations matched against its cash and cash flows.

In the chart below, the stacked bars represent the firm’s obligations each year for the next seven years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand available at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).

Its BB- rating suggests a high risk of default, but the CCFP shows that LGI’s cash flows cover all of its miniscule operating obligations until 2026, when its large cash reserve will handily cover its 2025 debt.

That’s why the Valens Credit Rating for the name is a much stronger IG4.

Even though all operating obligations are covered by cash flows, ratings agencies continue to discredit them because of their massive debt headwall in 2025.

On the contrary, Valens Credit Rating represents the full story of the company. LGI Homes has a lot less risk attached to it than what the rating agencies suggest.

It is our goal to bring forward the real creditworthiness of companies, built on the back of better Uniform Accounting.

To see Credit Cash Flow Prime ratings for thousands of companies, click here to learn more about the various subscription options now available for the full Valens Database.

SUMMARY and LGI Homes, Inc. Tearsheet

As the Uniform Accounting tearsheet for LGI Homes, Inc. (LGIH:USA) highlights, the Uniform P/E trades at 7.2x, which is below the global corporate average of 24.0x, but around its historical P/E of 8.0x.

Low P/Es require low EPS growth to sustain them. That said, in the case of LGIH, the company has recently shown a 36% Uniform EPS growth.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, LGIH’s Wall Street analyst-driven forecast is for a 6% EPS shrinkage in 2022 and a growth of 6% in 2023.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify LGIH’s $98 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to decline by 16% over the next three years. What Wall Street analysts expect for LGIH’s earnings growth is below what the current stock market valuation requires in 2022 and 2023.

Furthermore, the company’s earning power in 2021 is 3x the long-run corporate average. Moreover, cash flows and cash on hand are more than 3x its total obligations—including debt maturities and capex maintenance. All in all, this signals a low dividend risk.

Lastly, LGIH’s Uniform earnings growth is well below its peer averages, but the company is trading around its average peer valuations.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

View All

You don’t have access to the Valens Research Premium Application.

To get access to our best content including the highly regarded Conviction Long List and Market Phase Cycle macro newsletter, please contact our Client Relations Team at 630-841-0683 or email

Please fill out the fields below so that our client relations team can contact you

Or contact our Client Relationship Team at 630-841-0683