Is Lennar’s Success Sustainable?

With shares of Lennar Corp. (NYSE:LEN) trading at around $39.06, 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, along with other homebuilders, has performed extremely well over the past several years, but momentum has slowed. What is the future likely to hold?

There are many positives and negatives for this story at the moment. An opinion will be formed, but reading this situation is extremely difficult. It’s highly recommended that readers form their own opinions based on the information provided, as well as any other information they can find.

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On the positive side, Lennar has rebuilt itself, shed overhead, and improved its balance sheet. It has also seen growth in new home orders, improvement in average selling prices and home closings, stronger margins, and improved volumes. Furthermore, Lennar has reduced incentives and made strategic land acquisitions.

Negatives include rising costs, tight lending standards, a weak consumer, and a housing recovery that is area-specific opposed to broad-based. The latter would indicate an organic recovery. One other important note is that there has been aggressive insider selling on Lennar’s stock over the past several months.

Let’s reveal the elephant in the room, which are low interest rates. This interest rate environment creates a party-like atmosphere. The party starts slow, but then everyone hears about it and joins. At some point, the party is so big that responsible neighbors call the police. The party is broken up, extreme hangovers last for extended periods of time, and everyone swears they will never drink again. So, is the party in its early stages, mid stages, or late stages? No one knows the answer to that question, which is what makes any company related to real estate so difficult to read.

For now, let’s take a look at some comparative numbers. The chart below compares basic fundamentals for Lennar, PulteGroup (NYSE:PHM), and Toll Brothers Inc. (NYSE:TOL). Lennar has a market cap of $7.54 billion, PulteGroup has a market cap of $7.47 billion, and Toll Brothers has a market cap of $5.51 billion.

LEN

PHM

TOL

Trailing   P/E

12.05

35.78

11.27

Forward   P/E

16.56

13.05

23.59

Profit   Margin

16.51%

4.28%

24.90%

ROE

N/A

9.99%

17.21%

Operating   Cash Flow

N/A

$760.14 Million

-$312.70 Million

Dividend   Yield

0.40%

N/A

N/A

Short   Position

23.90%

N/A

5.20%

 

It looks as though many people are betting against Lennar’s potential for future success. 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.

Debt-To-Equity

Cash

Long-Term Debt

LEN

1.26

$1.25 Billion

$5.04 Billion

PHM

1.23

$1.48 Billion

$2.69 Billion

TOL

0.69

$793.58 Million

$2.16 Billion

 

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T = Technicals Have Weakened    

Lennar has been one of the top performers throughout the broader market over the past three years. However, that momentum has stalled.

1 Month

Year-To-Date

1 Year

3 Year

LEN

-6.60%

1.08%

52.39%

128.0%

PHM

-4.14%

6.36%

130.20%

72.92%

TOL

-6.94%

0.71%

43.56%

60.16%

 

At $39.06, Lennar is trading below its 50-day SMA and 100-day SMA, but above its 200-day SMA.

50-Day   SMA

40.44

100-Day   SMA

39.73

200-Day   SMA

36.61

 

E = Earnings Have Improved                      

Revenue and earnings have both improved over the past several years. However, the current industry environment isn’t sustainable over the long haul.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

4.58

3.12

3.07

3.10

4.11

Diluted   EPS ($)

-7.01

-2.45

0.51

0.48

3.11

 

When we look at the last quarter on a year-over-year basis, we see improvements in revenue and earnings. However, we see declines in revenue and earnings on a sequential basis.

2/2012

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

0.57

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

It’s entirely possible that the current industry environment has legs. If interest rates remain low and credit improves, then there is a lot more upside potential for the industry. On the other hand, the housing recovery isn’t broad-based, unemployment remains a concern, and there aren’t many positive signs for the consumer.

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Conclusion

The average household income has declined, which makes a sustainable housing recovery unlikely. With a weaker consumer, the only potential solution to make this recovery somewhat sustainable is improved credit markets, but this would put the industry right back where it was in the mid-2000s.

Many people fear that real estate is a bubble while others don’t see that as the case at all. It simply comes down to the location. As far as stocks for homebuilders go, the buying seems to be tired. However, a rebound can’t be counted out. As stated earlier, this situation is very difficult to read.

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 am currently short technology, financials, the Russell 2000, and the euro.

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