Is Lennar Worth the Risk?

With shares of Lennar Corp. (NYSE:LEN) trading at around $42.11, is LEN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The homebuilders are at an interesting point in time. There are many reasons to be optimistic as well as pessimistic. The biggest positives are improvements in housing starts and average-selling-price growth. The biggest negatives are tight credit, supply chain constraints, and increased costs, including softwood lumber, gypsum, tar roofing, insulation, and concrete.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Looking at Lennar specifically, this is a company that has solid margins, a 0.40 percent yield (peers don’t offer any yield), improvements in revenue and earnings, and a strengthened balance sheet. Lennar has shed an enormous amount of overhead. Currently, it’s slowing the pace of homebuilding in California, Arizona, and Florida. Lennar management wants more land to become available first. This conservative approach might hamper growth potential, but it will help margins.

The biggest concerns for Lennar at the moment are increased costs, subpar cash flow, and a lack of resiliency. In regards to the latter, the stock was hit much harder than peers in 2008/early 2009. However, Lennar is being managed much better this time around.

Now let’s take a look at some comparative numbers. The chart below compares fundamentals for Lennar, PulteGroup (NYSE:PHM), and Toll Brothers Inc. (NYSE:TOL). Lennar has a market cap of $8.06 billion, PulteGroup has a market cap of $8.53 billion, and Toll Brothers has a market cap of $5.95 billion.

LEN

PHM

TOL

Trailing   P/E

12.92

28.52

12.16

Forward   P/E

18.00

14.79

24.93

Profit   Margin

16.51%

5.87%

24.90%

ROE

19.11%

14.25%

17.21%

Operating   Cash Flow

 -$613.70 Million

 $916.07 Million

 -$312.70 Million

Dividend   Yield

0.40%

N/A

N/A

Short   Position

22.80%

6.80%

5.20%

 

The large short position on Lennar stands out. Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Normal         

The debt-to-equity ratio for Lennar is close to the industry average of 1.10. Though it’s not overly concerning, it’s not as strong as the debt-to-equity ratios as its peers, especially Toll Brothers. It’s interesting to note that Toll Brothers also has a much smaller short position. When interest rates increase, Toll Brothers will the best situated.

Debt-To-Equity

Cash

Long-Term Debt

LEN

1.25

$1.18 Billion

$5.09 Billion

PHM

1.14

$1.59 Billion

$2.60 Billion

TOL

0.69

$793.58 Million

$2.16 Billion

 

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

T = Technicals Are Strong  

Lennar has been a top performer over a three-year time frame. Both Lennar and PulteGroup have outperformed Toll Brothers by wide margins over the past three years. However, Toll Brothers will likely hold up best if the market heads south.  

1 Month

Year-To-Date

1 Year

3 Year

LEN

8.67%

9.11%

50.40%

115.00%

PHM

17.60%

22.91%

124.50%

70.38%

TOL

10.97%

9.16%

37.32%

57.40%

 

At $42.11, Lennar is trading above all its averages.

50-Day   SMA

40.30

100-Day   SMA

40.21

200-Day   SMA

37.49

 

E = Earnings Have Been Strong                              

Earnings are listed as strong due to 2012. However, it would be difficult to see sustainable earnings growth over the next few years.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

4.58

3.12

3.07

3.10

4.11

Diluted   EPS ($)

-7.00

-2.45

0.51

0.48

3.11

 

When we look at the previous quarter on a year-over-year basis, we see an increase in revenue and earnings.

2/2011

5/2012

8/2012

11/2012

2/2013

Revenue   ($)in   millions

724.86

930.16

1.10B

1.35B

989.95

Diluted   EPS ($)

0.08

2.06

0.40

0.56

0.26

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Once again, housing starts and average-selling-price growth are positives. On the other hand, there are several economic concerns at the moment, which include weak GDP, sequester, austerity, and interest rates. The latter two are more potential concerns, but they’re likely to become realities in the future.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Conclusion

As long as rates remain low, homebuilding stocks have the potential to continue their surge. On the other hand, while there are differences between now and the mid-2000s, there are also many similarities, which is a potential red flag.

All factors considered, Lennar is a WAIT AND SEE.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.