LGI Homes Stock Appears To Be Significantly Overvalued

- By GF Value

The stock of LGI Homes (NAS:LGIH, 30-year Financials) gives every indication of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $158.09 per share and the market cap of $3.9 billion, LGI Homes stock shows every sign of being significantly overvalued. GF Value for LGI Homes is shown in the chart below.


LGI Homes Stock Appears To Be Significantly Overvalued
LGI Homes Stock Appears To Be Significantly Overvalued

Because LGI Homes is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 21.1% over the past three years and is estimated to grow 9.44% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. LGI Homes has a cash-to-debt ratio of 0.07, which ranks worse than 88% of the companies in Homebuilding & Construction industry. Based on this, GuruFocus ranks LGI Homes's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of LGI Homes over the past years:

LGI Homes Stock Appears To Be Significantly Overvalued
LGI Homes Stock Appears To Be Significantly Overvalued

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. LGI Homes has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.4 billion and earnings of $12.74 a share. Its operating margin is 15.40%, which ranks better than 78% of the companies in Homebuilding & Construction industry. Overall, the profitability of LGI Homes is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of LGI Homes over the past years:

LGI Homes Stock Appears To Be Significantly Overvalued
LGI Homes Stock Appears To Be Significantly Overvalued

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of LGI Homes is 21.1%, which ranks better than 88% of the companies in Homebuilding & Construction industry. The 3-year average EBITDA growth rate is 26.4%, which ranks better than 80% of the companies in Homebuilding & Construction industry.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, LGI Homes's return on invested capital is 20.37, and its cost of capital is 10.08. The historical ROIC vs WACC comparison of LGI Homes is shown below:

LGI Homes Stock Appears To Be Significantly Overvalued
LGI Homes Stock Appears To Be Significantly Overvalued

In summary, the stock of LGI Homes (NAS:LGIH, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 80% of the companies in Homebuilding & Construction industry. To learn more about LGI Homes stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.