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Lennar Corporation (LEN - Analyst Report) reported adjusted earnings of 56 cents per diluted share in the fourth quarter of fiscal 2012, beating the comparable prior-year earnings by 250%. The earnings beat was driven by double-digit growth in homebuilding revenues and solid operating margins. Earnings also surpassed the Zacks Consensus Estimate of 44 cents by 27.3%.

Total revenue in the quarter grew 42% year over year to $1.35 billion, lagged the Zacks Consensus Estimate of $1.30 billion by 3.8%. Lennar benefited from both pricing and volume growth, with the housing market showing signs of stability.

Quarter Details  

Homebuilding revenues grew 43.0% y/y to $1.2 billion. Home sales were $1.2 billion in the quarter, up 41% year over year. The increase in home sales was driven by a 7.0% hike in average sales price of homes delivered and 32% rise in the number of new homes delivered. The company delivered 4,426 homes in the quarter. Land sales amounted to $40.7 million, up 130% year over year.

New home orders increased 32% to 3,983 homes in the fourth quarter of 2012 as a stable market, backed by low home prices and low interest rates, increased the demand for home buying. As renting became expensive, buying a home turned out to be a more feasible option.  

The company’s backlog totaled 4,053 homes as of November 30, 2012, up 87% from 2,171 homes as of November 30, 2011. Potential housing revenues from backlog rose a huge 107% to $1.2 billion from $560.7 million last year.

Gross margin on home sales expanded 410 basis points to 23.5% on the back of a rise in average sales price, increased deliveries from new higher-margin communities and reduced incentives. Operating margin on home sales improved 660 basis points to 12.2%, driven by price increases and higher revenue.

Financial Services segment revenues climbed 68% to $121.0 million in the quarter. The operating earnings of Lennar Financial Services were $33.2 million in the fourth quarter of 2012 compared with $9.1 million in the prior year quarter.

The improvement in profit was driven by higher volumes in the segment's mortgage and title operations and margin improvement in the mortgage operations. Volume and margin expansion were driven by higher number of homes delivered and refinance transactions.

Rialto Investments revenues slipped 22.6% to $36.0 million in the quarter. Rialto Investments’ operating earnings of $4.6 million (including earnings from non-controlling interests) in the fourth quarter of 2012, declined from operating earnings of $8.0 million (including non-controlling interests) in the prior year quarter.

Fiscal 2012

A peer of Meritage Homes Corporation (MTH - Snapshot Report), Lennar reported adjusted earnings of $3.11 per share (including partial reversal of the deferred tax asset valuation allowance) for fiscal 2012, beating the comparable prior-year earnings by a wide margin of $2.63.

The earnings beat was driven by double-digit growth in homebuilding revenues and solid operating margins. Earnings surpassed the Zacks Consensus Estimate of $2.99 by 4.0%.

Total revenue in the quarter grew 33% year over year to $4.10 billion, lagged the Zacks Consensus Estimate of $4.06 billion by 1%. Lennar benefited from 37% increase in new orders and 27% increase in number of homes delivered.

Outlook

The company expects to continue to achieve further profitability in fiscal 2013 on the back of strong liquidity position, land acquisitions and new community openings.   

Lennar carries Zacks Rank #3 (Hold). However, we believe the stock will jump to Zacks Rank #1 or #2 after announcing solid results.

We appreciate that Lennar is gaining momentum with steadily improving housing conditions, rising home prices, declining inventories and improving consumer confidence.  Lennar has witnessed solid year-over-year growth in new home orders, average selling prices and home closings in all the 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.

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.

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