We are maintaining our Neutral recommendation on Lennar Corporation (LEN - Analyst Report) following appraisal of fiscal third quarter results.
Lennar’s third quarter earnings per share of 34 cents soared 209% from the prior-year quarter banking on solid top-line and margin growth. Earnings beat the Zacks Consensus Estimate by 25.9%. Total revenue climbed 34% to $1.1 billion in the quarter as Lennar benefited from pricing and volume growth with the housing market stabilizing. Revenues from the Homebuilding segment rose 34% year over year to $955.8 million driven by both smart land acquisitions and solid home sales.
Lennar has witnessed solid year-over-year growth in new home orders, average selling prices and home closings in all the three quarters of 2012. Margins have also been above average, despite rising costs, driven by strong operating leverage. Lennar also appears to be well positioned for growth in the rest of this fiscal year.
Lennar is considered to be a leading homebuilder in the U.S. The company offers a diversified line of homes for first-time, move-up and active adult homebuyers. Lennar strategically focuses on acquiring higher-margin, well-positioned communities and avoids the fringe or tertiary markets where price is the only driver. The company’s focus on the quality of communities instead of quantity is benefiting its margins and new sales orders. This is a clear differentiating factor for Lennar, giving it a competitive advantage versus peers.
After the tough 2006-2007 period, Lennar’s management believes the housing market has begun to see signs of stabilization, particularly in the most-desirable, high-end communities. Management believes that stability in the home buying market combined with low interest rates and low home prices while renting becomes more expensive have increased the affordability of homes. Improvement in employment and consumer confidence is also contributing to a rise in demand for new homes. Inventory of foreclosed homes and short sale homes is declining, thus stabilizing prices of new homes. These factors led to new home orders increasing by 5% in 2011 and almost 40% in the first nine months of 2012. We believe that the company is performing better than its peers by increasing sales prices, reducing incentives, improving volumes and by making opportunistic land acquisitions. Large homebuilders like Lennar, who have significant land positions, broad geographic and product diversity, and better capital positions, are expected to benefit the most as market conditions recover.
Further, the Rialto segment is progressing well and has incremental growth opportunities as the market continues to improve. The Rialto connections and relationships with banks and other local sellers have made significant contributions to Lennar’s core Homebuilding business.
However, we believe that the stabilization process in the housing market is erratic and not yet adequately broad-based. The housing market improvement has been uneven across the country and is concentrated in high-end communities. Therefore, we would like to remain on the sidelines until we see a broad based housing recovery. Lennar competes with D.R. Horton Inc. (DHI - Analyst Report) and PulteGroup, Inc. (PHM - Analyst Report).