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On January 9, we upgraded homebuilder Lennar Corporation (LEN - Analyst Report) to Outperform based on fast improving industry fundamentals.

Why the Upgrade?

On September 27, 2012, Lennar Corporation reported adjusted earnings (excluding income tax adjustments) of 34 cents per share in the third quarter of fiscal 2012, beating the Zacks Consensus Estimate by 25.9%. Earnings also skyrocketed 209% 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 with the housing market stabilizing. Revenues also beat the Zacks Consensus Estimate of $1.03 billion.

Lennar has announced impressive results in all the quarters of 2012. 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 appears confident of significant growth in the rest of the fiscal year and even thereafter.

Lennar has delivered positive earnings surprises in all the quarters of 2012 with an impressive average earnings surprise of 27.4% in the trailing four quarters. 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. Moreover, Lennar’s focus on the quality of communities instead of quantity also benefits its margins and new sales orders.

Lennar is fast gaining momentum with steadily improving housing conditions, rising home prices, declining inventories, and improving consumer confidence.  Lennar appears the most well positioned to take advantage of the recovery in the housing market.

Lennar competes with PulteGroup, Inc. (PHM - Analyst Report), D.R. Horton, Inc. (DHI - Analyst Report) and Toll Brothers Inc. (TOL - Analyst Report). All these homebuilders are also doing quite well.

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