Legacy Housing meets some but not all of Benjamin Graham's requirements for a defensive stock. The Residential Construction company does not offer a large enough margin of safety for cautious investors, but it does have many qualities that may interest more enterprising investors.
Legacy Housing trades at Attractive Multiples
Benjamin Graham's so-called “Graham number” is a popular metric determining the fair price of a stock in relation to its earnings and the book value of its equity. We calculate the Graham number as √(22.5 * 5 year average earnings per share (1.72) * 5 year average book value per share (16.94), which for Lennar gives us a fair price of $30.86.
In comparison, Legacy Housing’s market price is $19.56 per share. The analysis shouldn’t end here. The Graham number is just one of seven requirements for defensive stocks listed in Chapter 14 of The Intelligent Investor, which we will review below.
Positive Retained Earnings From 2018 To 2022, No Dividend Record, and Eps Growth In Excess Of Graham'S Requirements
Ben Graham wrote that an investment in a company with a record of positive retained earnings could contribute significantly to the margin of safety. Legacy Housing had positive retained earnings from 2018 to 2022 with an average of $100.89 Million over this period.
Another one of Graham's requirements is for a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.We only have 5 years of EPS on Legacy Housing, so it fails the Graham test on this basis alone, but we still think it's worthwhile to look at its growth over the available period. In 2018, the earnings per share was $1.07, while in 2022, it was $2.74. This give us a 156.07% growth rate during this period, which will satisfy Ben Graham's requirement if it continues on this trend.
We have no record of Legacy Housing offering a regular dividend.
Legacy Housing’s Balance Sheet Meets Graham’s Criteria
It was also essential to Graham that the company’s current assets outweigh its current liabilities, and that its long term debt be inferior to the sum of its net current assets (current assets minus total liabilities). This is the aspect of the analysis that most companies fail, yet Legacy Housing passes comfortably, with an average current ratio of 2.6, and average debt to net current asset ratio of 0.1.
Conclusion
Legacy Housing offers a decent combination of value, growth, and profitability. These factors imply that the investment offers a decent margin of safety — especially if the shares are bought during a sell-off.
| 2019-02-14 | 2020-03-30 | 2021-03-17 | 2022-08-03 | 2023-03-15 | |
|---|---|---|---|---|---|
| Revenue (k) | $161,877 | $168,956 | $176,724 | $197,507 | $257,015 |
| Gross Margins | 34.0% | 38.0% | 38.0% | 42.0% | 42.0% |
| Operating Margins | 20% | 23% | 27% | 30% | 31% |
| Net Margins | 13.0% | 17.0% | 21.0% | 25.0% | 26.0% |
| Net Income (k) | $21,513 | $28,844 | $37,995 | $49,871 | $67,773 |
| Net Interest Expense (k) | -$2,317 | -$702 | -$138 | $1,208 | $2,567 |
| Depreciation & Amort. (k) | -$838 | -$1,014 | -$1,212 | -$1,587 | -$1,936 |
| Earnings Per Share | $1.07 | $1.18 | $1.57 | $2.05 | $2.74 |
| EPS Growth | n/a | 10.28% | 33.05% | 30.57% | 33.66% |
| Diluted Shares (k) | 20,197 | 24,437 | 24,236 | 24,276 | 24,742 |
| Free Cash Flow (k) | $8,957 | $13 | $977 | $66,248 | $425 |
| Capital Expenditures | -$6,137 | -$4,206 | -$2,815 | -$5,952 | -$2,116 |
| Net Current Assets (k) | $17,386 | -$8,264 | -$24,791 | $35,268 | $52,372 |
| Long Term Debt (k) | $17,416 | $2,001 | $36,174 | $7,993 | $4,666 |
| LT Debt to Equity | 0.09 | 0.01 | 0.14 | 0.03 | 0.01 |
