Despite reporting better-than-expected fourth-quarter 2013 results, we maintained a Neutral recommendation on Lennar Corporation (LEN - Free Report) , on Feb 5, due to slowing order trends.
Why the Reiteration?
Though Lennar announced strong fiscal fourth-quarter results on Dec 18, it witnessed a slowdown in order growth.
Lennar beat the Zacks Consensus Estimate for both earnings and revenues in the fourth quarter on the back of strong momentum in the housing market. Adjusted earnings of 73 cents per share grew 30.4% year over year driven by growth in both revenues and margins.
However, even though homebuilding revenues grew around 50% in the quarter, net order pace slowed down. Though new home order grew 13% year over year, it declined sequentially due to slowing sales pace.
The recent spike in mortgage rates, rising home prices and the political uncertainty in Washington has slowed order pace and traffic.
However, management pointed out that it saw sequential improvement in order trends throughout the fourth quarter with November being the strongest month in the quarter. As a result, the company expects a strong spring selling season for fiscal 2014.
Management seemed confident of seeing strong demand in future quarters as buyers adjust to the rising prices and interest rates and return to the market. Supply shortages, both of new single-family and multi-family homes, and pent-up demand paved the way for the housing recovery.
However, though profits are expected to continue to improve in 2014, it is noteworthy that Lennar expects flattish gross margins in the year, unlike the substantial improvement seen in the past two fiscal years. Gross margin is expected to average about 25% in 2014, almost flat with the 2013 levels.
Other Stocks to Consider
Lennar carries aZacks Rank #3 (Hold). Better ranked homebuilders include D.R. Horton, Inc (DHI - Free Report) , MRV Engenharia e Participa , and Standard Pacific Corp. . While D.R. Horton and MRV Engenhariasport a Zacks Rank #1 (Strong Buy), Standard Pacific carries a Zacks Rank #2 (Buy).