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Lennar (LEN) Up 18.1% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Lennar (LEN - Free Report) . Shares have added about 18.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Lennar due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Lennar Q4 Earnings and Revenues Beat Estimates

Lennar Corporation reported better-than-expected results in fourth-quarter fiscal 2019 (ended Nov 30, 2019). This marks the third consecutive quarter of earnings beat. The results mainly benefited from solid demand for new homes, depicting healthy housing market fundamentals stemming from low unemployment, higher wages and a decline in inventory levels.

The company reported quarterly earnings of $2.13 per share, surpassing the Zacks Consensus Estimate of $1.90 by 12.1%. Also, the reported figure jumped 15.8% from $1.84 reported in the year-ago quarter (excluding one-time gain of 58 cents per share from the sale of Rialto and non-recurring expenses). The upside was mainly driven by higher deliveries and continued operating leverage, backed by technological efforts.

Revenues of $6.97 billion topped the consensus estimate of $6.7 billion by 4.9%. The reported figure also increased 7.9% year over year.

Segment Details

Homebuilding: Revenues from the segment totaled $6.53 billion, up 7.7% from the prior-year period. The increase was backed by higher number of homes delivered during the quarter.

Within the Homebuilding umbrella, home sales contributed $6.44 billion to total revenues, up 8.3% from a year ago, and land sales accounted for $89.7 million, down 21.4% from the year-ago figure.

Home deliveries during the reported quarter increased 16% year over year to 16,420, buoyed by higher number of homes delivered across all the regions served by the company.

The average sales price of homes delivered was $393,000, reflecting a 7% year-over-year decline. The decline in selling price was owing to continued shift to the entry-level market.

New orders grew 23.4% from the year-ago quarter to 13,089 homes. Potential value of net orders also increased 22.6% year over year to $5.16 billion.

Backlog at the end of fiscal 2019 marginally decreased 0.2% from a year ago to 15,577. Potential housing revenues from backlog also declined 4.1% year over year to $6.3 billion.

Homebuilding Margins

Gross margin on home sales was 21.5% in the quarter, up 10 bps. The upside was attributable to backlog/construction in progress write-up related to purchase accounting adjustments on CalAtlantic Group, Inc. homes that were delivered during the comparable period of last year.

Selling, general and administrative or SG&A expenses, as a percentage of home sales, improved 30 bps to 7.6%. The improvement was due to better operating leverage, owing to increased home deliveries.

Operating margin on home sales also improved 40 bps year over year to 13.9% in the quarter.

Financial Services: The segment’s revenues increased almost 1% year over year to $252.8 million in the reported quarter. However, operating earnings came in at $81.2 million, up from $57.6 million a year ago. The upside was primarily backed by a strong mortgage business.

Lennar Multi-Family: Revenues of $175.9 million from the segment increased 61.2% from the prior-year quarter. However, the segment generated operating earnings of $4.8 million in the quarter, down from $33 million in the comparable year-ago period.

Lennar Other: The segment’s revenues totaled $7.9 million, down 76.5% from $33.7 million a year ago. Operating earnings were $10.8 million during the quarter against a loss of $49.2 million in the comparable period of 2018.

Fiscal 2019 Highlights

Earnings came in at $5.74 per share, reflecting an increase of 5.5% from $5.44 a year ago. Revenues of $22.3 billion were up 8% year over year on the back of 13% increase in home deliveries. In fiscal 2019, the company’s new orders jumped 12% from a year ago to 51,439 homes.

Financials

Lennar had homebuilding cash and cash equivalents of $1.2 billion as of Nov 30, 2019, down from $1.34 billion on Nov 30, 2018. Net homebuilding debt was $6.58 billion as of Nov 30, 2019 compared with $7.21 billion on Nov 30, 2018. Net debt-to-capital ratio at the end of fiscal 2019 was 29.2% compared with 33.1% at fiscal 2018-end.

During the fiscal fourth quarter, the company repurchased 1.7 million shares of common stock for $98.2 million.



Fiscal Q1 Guidance

Lennar expects deliveries in the range of 9,800-10,000 homes and homebuilding gross margin within 19.7-19.8%. Orders are expected in the band of 11,300-11,500 units. Average selling price is expected within $390,000-$395,000.

SG&A expenses, as a percentage of home sales, are likely to be within 9.4-9.5%. Earnings per share are expected within 80-85 cents.

Financial services pretax profit is expected in the range of $25-$27 million.

Fiscal 2020 Guidance

Lennar expects deliveries in the range of 54,000-55,000 homes and homebuilding gross margin within 20.5-21%.

Average selling price is expected to be $380,000. SG&A expenses, as a percentage of home sales, are likely to be between 8.2% and 8.3%. It expects 1-2% community growth.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -5.45% due to these changes.

VGM Scores

Currently, Lennar has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Lennar has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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