Will Lennar Continue to Build Momentum?

With shares of Lennar Corp. (NYSE:LEN) trading at around $41.02, 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

Lennar beat expectations and raised guidance. Based on these results, it looks like Lennar might be one of the few bright spots in a weak market today. At least it has more potential to close green than most other stocks. Lennar is up 1.54 percent so far in the pre-market.

Q4 expectations were for $0.44 EPS on $1.26 billion in revenue. EPS came in at $0.56, and revenue came in at $1.35 billion. Lennar delivered 4,443 homes, which is a 32 percent increase, and the average selling price of homes delivered rose to $261,000, which was a 7 percent increase. Lennar’s operating margin on home sales is now a solid 12.2 percent, which is mostly in thanks to an increase in selling prices and fewer buyer incentives. Most importantly, Lennar expects strong profitability in 2013.

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We’ll take a deeper look into this story in the Trends section. For now, let’s take a look at some important numbers.

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Lennar isn’t great, but it’s normal for the industry. The balance sheet is in negative territory, which is also normal for the industry. However, operating cash flow is -$634 million. This number should improve as business continues to pick up.

Debt-To-Equity

Cash

Long-Term Debt

LEN

1.11

$957.26 Million

$3.67 Billion

TOL

0.72

$1.27 Billion

$2.25 Billion

PHM

1.46

$1.64 Billion

$3.10 Billion

 

T = Technicals on the Stock Chart Are Strong

Lennar has been one of the top performers in the market over the past three years. It has also outperformed Toll Brothers (NYSE:TOL) and PulteGroup (NYSE:PHM). In addition to that, Lennar offers small dividend payments whereas its competitors do not.

1 Month

Year-To-Date

1 Year

3 Year

LEN

9.35%

5.51%

86.43%

155.70%

TOL

10.47%

5.41%

49.41%

72.64%

PHM

11.38%

5.12%

150.50%

69.99%

 

At $41.02, Lennar is currently trading above all its averages.

50-Day SMA

38.23

100-Day SMA

36.75

200-Day SMA

32.46

 

E = Earnings and Revenue Have Been Improving

Lennar was one of the few companies in the broader market not to show an improvement in revenue from 2009 to 2010. However, EPS improved considerably at that time. The company became profitable again. Revenue showed a slight improvement in 2011 while EPS dropped, but the company still remained profitable. With seven straight increases in new home orders, Lennar is on the right track at the moment.

2007

2008

2009

2010

2011

Revenue ($)in billions

10.19

4.58

3.12

3.07

3.10

Diluted EPS ($)

-12.31

-7.61

-2.45

0.51

0.48

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

8/2011

11/2011

2/2012

5/2012

8/2012

Revenue ($)in millions

820.19

952.65

724.86

930.16

1.10B

Diluted EPS ($)

0.11

0.16

0.08

2.06

0.40

 

T = Trends Support the Industry for Now

Home builders have been performing well recently for a variety of reasons. The two biggest reasons are low mortgage rates and affordable home prices. This is a positive trend as well as a trend that is likely to last for an extended period of time. However, in the long run, it’s not sustainable. Low mortgage rates won’t be around forever, and if demand for homes continues, then home prices will increase to levels where there will be fewer home buyers. We are not living in an economic environment where consumers are strong enough to continuously drive up home prices.

Conclusion

Lennar is a great momentum play. However, anyone who jumps on board should be wary of danger signs in the economy, one of which will be the upcoming debt ceiling dilemma. This will be a bigger challenge than the fiscal cliff.

At the present time, Lennar is an OUTPERFORM.

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