LGI Homes, Inc. (LGIH) stock intrinsic value fair value estimate & owner earnings analysis

LGI Homes builds entry-level single-family homes on standardized floor plans in 144 active communities across the West, Northwest, Central, Florida and Southeast regions of the United States. It also sells homes in bulk to other buyers through a wholesale channel, which was 15.7% of 2025 closings. Owner earnings. We measure earnings as operating cash flow, adding back the cash spent on building inventory and other working capital, and then subtracting stock compensation and the capital spending needed to stay in business. Homebuilders spend heavily on land and homes under construction, so reported operating cash flow has been negative in most years (it was negative $140 million in 2025) even while the company was profitable. Adding that inventory spending back makes owner earnings resemble net income plus small non-cash items. Owner earnings per share over the last ten years were $3.31 (2016), $4.67, $6.37, $6.96, $12.60 (2020), $17.81 (2021), $13.35, $8.40, $7.76 and $3.54 (2025). We treat 2020 and 2021 as boom years that should not set the normal level. What changed. In 2025 homes closed fell 22.3% to 4,685 as buyers were held back by affordability, and gross margin fell to 20.7% from 24.2% (including a $6.7 million write-down on four communities). Net income dropped 63% to $72.6 million. Owner earnings fell about 54% from 2024. In the first half of 2026 revenue was $849 million versus $872 million a year earlier and net income was $29.1 million versus $35.5 million, so the decline has slowed in revenue but profit is still lower. Inventory spending fell sharply, and operating cash flow was positive $59 million against negative $214 million in the same period of 2025. Base case: $61.09 per share. Because last year's decline was about 54% and the first half of 2026 was still weaker on profit, we start 2026 at $3.30 per share, close to the 2025 level, and do not assume a rebound. We then let owner earnings return to $4.00 in 2027, $4.60 in 2028 and $5.00 from 2029, staying flat. That $5.00 is well below the $7.76 and $8.40 earned in 2024 and 2023 under similar interest-rate conditions and below the roughly $6.66 median of the ten years excluding the 2020 to 2022 spike. We are crediting a partial return to levels the business has already reached, not growth in homes closed or market share, and we do not credit any market recovery. After 2035 we assume the earnings continue for fifteen more years on the strength of a ten-year record of positive owner earnings in every year, and then assign nothing further, because a land-dependent builder must keep reinvesting and nothing in the filings shows earning power beyond that. Bear case: $26.32. Owner earnings fall to $2.80 in 2026 and $2.00 in 2027 and stay there. The company carries about $1.68 billion of notes and credit facility borrowings, with $494 million due in 2028 and $734 million in 2029, including 8.75% notes due 2028; refinancing at higher rates and continued margin pressure of the kind seen in 2025 would keep earnings near this level. Leverage is charged here only, and nothing is deducted from value for debt. Bull case: $89.04. Owner earnings recover to $3.50 in 2026, $5.00 in 2027, $6.50 in 2028 and $7.50 from 2029, matching what the business earned in 2023 and 2024 when margins and volumes were higher, with the same fifteen-year continuation afterward. What could make this wrong. The largest risk is that owner earnings overstate cash available to shareholders: 2023 to 2025 saw about $880 million of inventory build while debt rose from $1.48 billion to $1.66 billion, and the model assumes that spending stops being a drag once volumes stabilize. The first-half 2026 cash flow supports that only partially. A further margin decline below 20% or a refinancing of the 2028 and 2029 maturities on worse terms would push results toward the bear case. Discount rate is 6%.