Back to top

Image: Bigstock

Is Lennar (LEN) Stock a Good Investment After Strong 1H16?

Read MoreHide Full Article

We issued an updated research report on Lennar Corporation (LEN - Free Report) on Aug 24, 2016.

After outstanding operating results in fiscal 2015, Lennar delivered strong results in the first half of 2016. It beat the Zacks Consensus Estimate for both earnings and sales in both the first and second quarters. Homebuilding revenues rose 19% in the first half of 2016, backed by double-digit increase in home deliveries and higher average selling price (ASP) of homes. Homebuilding operating earnings surged 13% in the first half.

With the housing sector and the overall macro environment looking strong,we believe that Lennar is poised for continued strong performance in the second half.

LENNAR CORP -A Price and Consensus

 

LENNAR CORP -A Price and Consensus | LENNAR CORP -A Quote

The housing market has done reasonably well this year with demand for new and existing homes gaining from historically low interest rates, an improving job market with low unemployment, and income growth.

An improving economy, low interest rates, positive consumer confidence and a tight supply situation are also buoying hopes on the sector’s outperformance in the second half of 2016.

We believe that Lennar is well positioned to capitalize on this recovery driven by diverse revenue mix, strategic land investments and above-average order growth.

Moreover, its ancillary businesses — Rialto, Multi-Family, FivePoint and Financial Services — are evolving and should improve further in 2016. These growing platforms provide diversification as well as complementary long-term growth opportunities.

However, as the housing recovery gains impetus and competition for land assets intensifies, management has decided against purchasing low-margin land assets. Lennar has strategically shifted away from a land heavy acquisition strategy to acquiring lands with a shorter two to three-year average life. Instead, it wants to focus on slower but more orderly and sustainable growth to improve cash flows and profitability.

However, labor shortages, rising land, labor and construction cost along with sales slowdown in Houston might put a check on the housing growth momentum in the second half.

A shortage of buildable lots, skilled labor and available capital for smaller builders are limiting home production, thereby lowering the inventory of homes, both new and existing. Limited capital for land and land development has left entitled lands in short supply. The labor market has also tightened with limited availability of labor, dragging down the rapid growth in housing production. Labor shortages are resulting in higher wages while land prices are inflating due to limited availability. Rising land and labor costs are thus threatening the gross margins of Lennar as well as other homebuilders like D.R. Horton, Inc. (DHI - Free Report) , PulteGroup, Inc. (PHM - Free Report) and KB Home (KBH - Free Report) .

Nonetheless, homebuilders in general are on a high at the moment given the improving demand trend.   

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>

Published in