Lennar Corporation ( LEN - Analyst Report ) reported adjusted earnings of 40 cents per diluted share in the third quarter of fiscal 2012, beating the comparable prior-year earnings by a wide margin of 29 cents. The earnings growth was driven by double-digit growth in homebuilding revenues and solid operating margins. Earnings surpassed the Zacks Consensus Estimate by 13 cents.

Total revenue in the quarter grew 34% year over year to $1.1 billion as Lennar benefited from pricing and volume growth with the housing market showing signs of stability. Revenue surpassed the Zacks Consensus Estimate of $1.03 billion.

Homebuilding

Revenues from the Homebuilding segment rose 34.3% year over year to $955.8 million. Home sales increased 33% to $932.8 million driven by improved pricing and increase in the number of homes delivered.

Net home orders were up 44% to 4,198 homes in the quarter. Net orders increased on the back of a gradual recovery in the housing market. It was backed by low home prices and low interest rates. As renting became expensive, buying a home turned out to be a more feasible option.

New home deliveries, excluding unconsolidated entities, were up 28% year over year to 3,617 homes in the reported quarter. It was driven by an increase in all homebuilding segments due to greater demand.

The average sales price of homes delivered stood at $258,000, up 4.5% year over year as the housing market continues to stabilize. The company has begun to witness reduced sales incentives in some of its communities.

Sales incentives comprised 9.2% of home sales revenue in the third quarter, lower than 12.0% in the comparable prior-year quarter due to an improved sales rate and a higher percentage of homes being sold before the commencement of construction.

The company’s backlog totaled 4,513 homes as of August 31, 2012, up 79% from 2,519 homes as of August 31, 2011. Potential housing revenues from backlog rose 95% to $1.3 billion from $642.8 million.

In the quarter, revenue from land sales amounted to $23 million, up 109.1% year over year.

Gross margin on home sales expanded 210 basis points to 23.2% on the back of rise in average sales price, increased deliveries from new higher-margin communities and reduced incentives. Gross margins were strongest in the Western region. Operating margin on home sales improved 440 basis points to 11.2%, driven by price increases and higher revenue.

Selling, general and administrative (SG&A) expenses were $112.2 million in the third quarter of 2012, up 11.9% over the prior-year period. However, as a percentage of sales, SG&A improved 230 basis points to 12.0% owing to better operating leverage, as the company focuses on highmargin, well-located communities.

Financial Services

Financial Services segment revenues climbed 60.8% to $106.8 million. The segment posted operating earnings of $25.3 million in the quarter compared with $8.0 million in the year-ago period. The improvement in profit was primarily attributable to higher volumes and margins in the segment's mortgage operations, and higher volume of title operations, owing to increased number of refinance transactions and homes delivered.

Rialto Investments

Rialto Investments revenues slipped 11.6% to $37.2 million in the third quarter of 2012. Operating loss was $5.7 million (including net earnings attributable to non-controlling interest) in contrast to earnings of $11.7 million in the same period last year as the company concentrates on the sale and resolution of assets to maximize value.

Financial Position

Lennar had cash and cash equivalents of $692 million as of August 31, 2012 from homebuilding compared with $667.1 million as of May 31, 2012.

Outlook

Lennar has not provided any guidance for the upcoming quarters.

Overall, we are encouraged by the company’s impressive first half results and improved profitability. 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 carries a Zacks #1 Rank in the near term (Strong Buy rating).