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Lennar Corp.

LEN

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Leading national homebuilder Lennar Corporation (LEN - Analyst Report) has enjoyed strong earnings momentum thanks to impressive performances like in the fiscal third quarter, which saw year-over-year growth in revenues, new home orders, average selling prices and home closings.

This Zacks #1 Rank (Strong Buy) has beaten the Zacks Consensus Estimate in each quarter of 2012 so far, bolstered by increasing traffic levels due to heightened consumer demand for new homes.

Solid Third Quarter Beat

On September 24, Lennar Corporation reported adjusted earnings of 40 cents per share in the third quarter of fiscal 2012, beating the Zacks Consensus Estimate by 48.2%. Earnings also skyrocketed almost 264% from the prior-year quarter. The earnings growth was driven by improved homebuilding revenues and solid operating margins.

Total revenue in the quarter climbed 34% to $1.1 billion, driven by pricing and volume growth as the housing market stabilizes. Revenues also surpassed the Zacks Consensus Estimate of $1.03 billion.

Revenues from the Homebuilding segment rose 34% year over year to $955.8 million. Home sales expanded 33% to $932.8 million, driven by improved sale prices and an impressive net order increase. Home closings, new orders and backlog were all up in double digits from the year-ago period. Net home orders were up 44% to 4,198 homes in the quarter. The rise in net orders was due to a steady recovery in the housing market. It was backed by higher consumer confidence, stabilizing home prices and low interest rates.

Adjusted homebuilding gross margin expanded 210 basis points to 23.2% on the back of an increased average sales price, increased deliveries from new higher margin communities and reduced incentives. Operating margin on home sales improved 440 basis points to 11.2%, driven by tight cost controls and price increases. Operating earnings for the Financial Services and Rialto Investment segments also improved from the prior-year period.

A Bright Future Ahead

We believe that the company is performing better than its peers by increasing sales prices, reducing incentives, improving volumes and investing in well-positioned high-margin communities. Lennar’s management is optimistic about the company’s ability to sustain its growth and believes that the strong balance sheet, significant liquidity and efficient management team will help the company to capitalize on opportunities.

Earnings Estimates Going Up

The Zacks Consensus Estimate for fiscal 2012 has increased 244% over the last 90 days to $2.82 per share. For fiscal 2013, the Zacks Consensus Estimate rose by 2.2% over the same time frame to $1.37 per share.

Overall, an Attractive Valuation

Lennar currently trades at a forward price-to-earnings (P/E) of 13.3x, reflecting a 56.8% discount to the peer group average of 30.75x. On a price-to-book basis, shares trade at 1.88x, a 4.1% discount to the peer group average of 1.96. However, the stock has a trailing 12-month return on equity (ROE) of 3.4%, which is below its peer group average of 4.1%.

Chart Showing Consistent Rise

Shares of Lennar have been continuously rising since early June 2012 and significantly jumped after the second quarter earnings release. The stock price has almost tripled since mid-October lows, when the company was facing a fragile housing market. Moreover, the stock is currently trading above its 50- and 200-day moving averages, which stand at $32.10 and $26.63, respectively. In fact, the stock has been consistently trading above its 200-day moving average since the end of November 2011 and above its 50-day moving average since the end of June 2012.

Volume is fairly strong, averaging roughly 3950K daily. Lennar has mostly outperformed the S&P 500 over the past six months. The year-to-date return for the stock is 90.89% compared with the S&P 500’s return of 16.10%.

Based in Miami, Florida, Lennar is engaged in homebuilding and financial services in the U.S. It operates through three segments: homebuilding, financial services and Rialto Investments. Its core business remains homebuilding, which deals with the construction and sale of homes that include single-family attached and detached homes and multi-level residential buildings. The Financial Services business includes mortgage financing, title insurance and closing services. The Rialto Investments segment is involved in the acquisitions of portfolios of, or interests in portfolios of, distressed debt instruments and foreclosed properties. The market cap of the company is $7.10 billion.


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