Housing May Be Limping, but Lennar Corp. Is Getting Ready to Run
Lennar Corporation (NYSE:LEN) is an excellent company that you should strongly consider your portfolio if you believe in a strong housing rebound. That is because this company is engaged in homebuilding activities here in the United States. The company operates through several segments including Homebuilding East, Homebuilding Central, Homebuilding West, Homebuilding Southeast Florida, Homebuilding Houston, Financial Services, Rialto Investments, and Lennar Multifamily segments. Its homebuilding activities primarily include the construction and sale of single-family attached and detached homes to first-time, move-up, and active adult homebuyers, as well as the purchase, development, and sale of residential land.
The company also offers real estate related financial services, including mortgage financing, title insurance, and closing services for home buyers and others. In addition, it is involved in raising, investing, and managing third party capital, originating and securitizing commercial mortgage loans, as well as investing in real estate related mortgage loans, properties, and related securities. I am a believer in a housing rebound, despite how bad it has been. It’snot secret that this rebound from the Great Recession has been, weak, to put it best. However, it is only a matter of time before there is a strong rebound in housing. But Lennar is a buy now. It is performing very well, and just recently beat earnings on the top and bottom lines.
In its most recent quarter Lennar saw net earnings of $137.7 million, or $0.61 per diluted share, compared to net earnings of $137.4 million, or $0.61 per diluted share. This is rather flat year over year growth, but deliveries of 4,987 homes during the quarter was up 12 percent.Revenues came in at $1.8 billion and this was up 27 percent compared to last quarter. Further, new orders of 6,183 homes were up 8 percent and the new orders dollar value were $2.0 billion which was up 21 percent. It should also be noted that the backlog of 6,858 homes was up 11 percent and the backlog dollar value of $2.4 billion was up 26 percent. What about gross margin? There was improvement here as gross margin on home sales of 25.5 percent improved 140 basis points. Further administrative expenses as a percent of revenues from home sales was 10.8 percent which improved 10 basis points. Further operating margin on home sales of 14.7 percent improved 140 basis points.
Let’s also summarize the performance of each of the larger segments. First, the Lennar Home building segment saw operating earnings of $234.5 million, compared to $159.8 million. The Lennar Financial Services segment saw operating earnings of $18.3 million, compared to $29.2 million last quarter which was a bit disappointing. Rialto Investments operating earnings of $13.4 million was strong compared to $2.8 million in last year’s quarter. The Lennar Multifamily start-up segment saw and operating loss of $7.2 million, compared to $1.4 million in earnings which was also disappointing. Finally, the Lennar Homebuilding segment had cash and cash equivalents of $628 million at the end of the quarter and further they had no outstanding borrowings under the $950 million credit facility. This is a strong indicator. While some segments underperformed, overall, things were much stronger. CEO Stuart Miller stated:
“We are extremely pleased with our operating results in the second quarter. Our core homebuilding business is hitting on all cylinders. Fueled by a 14 percent increase in our average sales price and continued momentum from our land acquisition strategy, our gross and operating margins increased to 25.5 percent and 14.7 percent, respectively, the highest second quarter margins in the company’s history.While the spring selling season was softer than anticipated by us and the investor community, the homebuilding recovery continued its progression at a slow and steady pace. The fundamentals of the homebuilding industry remain strong driven by high affordability levels, favorable monthly payment comparisons to rentals and overall supply shortages. Demand in most of our markets continues to outpace supply, which is constrained by limited land availability. Complementing our core homebuilding business, our multifamily rental segment has continued to mature.
With a geographically diversified pipeline exceeding $4 billion and 17,000 apartments, this segment is positioned to become a meaningful contributor to our earnings. We expect to sell our first apartment community in the third quarter and should begin to have a more consistent pattern of apartment property sales, starting in the second half of 2015. Meanwhile, Rialto has continued its strategic growth to becoming a best in class asset manager. Rialto’s fund investments are poised for strong long term returns and its mortgage conduit business continues to provide steady, current earnings. While our homebuilding business remains the primary driver of our earnings growth, we are extremely well positioned across all of our platforms to capitalize on the opportunities of a recovering market.”
So here’s the bottom line. Housing has been limping along, but I just don’t see it getting much worse than it already has been. Lennar has managed to remain profitable and develop growth, and we haven’t even seen a real housing recovery. When that happens, expect Lennar’s stock to rocket higher. At 18 times earnings with a small dividend, but the opportunity for strong share price appreciation, I think the stock is attractive here. I rate it as a buy and assign a $51 price target.
Disclosure: Christopher F. Davis holds no position in Lennar Corporation and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $51 price target.