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Lennar Beats on Q1 Earnings, Revs

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Lennar Corporation’s (LEN - Free Report) first-quarter fiscal 2014 earnings of 35 cents per share beat the Zacks Consensus Estimate of 27 cents by 29.6%. Earnings jumped 34.6% from 26 cents reported in the prior-year quarter. Double-digit growth in homebuilding revenues and solid margins aided earnings growth. First-quarter earnings include a tax provision of $45.9 million against a tax benefit of $3.6 million last year.

Total revenue of this leading homebuilder grew 38% year over year to $1.36 billion as both the Homebuilding and Rialto Investments segments did significantly well in the quarter. Revenues also beat the Zacks Consensus Estimate of $1.29 billion by 5.4%.  

Homebuilding Revenues

Homebuilding revenues increased 41.8% year over year to $1.23 billion. Home sales were $1.1 billion in the quarter, up 33% year over year, driven by pricing gains and increased number of homes delivered. Land sales amounted to $91.2 million in the quarter, up from $13.4 million in the prior-year quarter.

New home orders increased 10% year over year to 4,465 homes in the first quarter on increased demand. However, net order growth declined sequentially due to harsh weather conditions, which slowed down the sales pace. The potential value of net orders increased 26% year over year to $1.5 billion.

New home deliveries, excluding unconsolidated entities, were up 13.3% year over year to 3,597 homes in the reported quarter. The increase was driven by demand growth in all the homebuilding segments, excluding Central. The average selling price (ASP) of homes delivered was $316,000, up 17.5% year over year and 2.9% sequentially.

Backlog grew 15% year over year in the quarter to 5,662 homes. Potential housing revenues from the backlog rose 33% year over year to $1.9 billion.

Sales incentives comprised 6.3% of home sales revenues in the first quarter, lower than 8.0% in the prior-year quarter and flat sequentially.

Increased Margins

Gross margin on home sales expanded a massive 300 basis points (bps) to 25.1% on the back of a rise in ASP, favorable product mix (increased deliveries from higher margin communities), a $5.5 million insurance recovery and reduced incentives, which offset headwinds from rising labor, land and material costs. The company claimed that continued momentum in land acquisition and an increase in average selling prices drove margins.

Selling, general and administrative (SG&A) expenses were $135.1 million in the first quarter of fiscal 2014, up 32.2% over the prior-year period. As a percentage of sales, however, SG&A improved 20 bps to 11.8%, driven by better operating leverage as volumes improved. Operating margin on home sales improved 310 bps to 13.2% during the quarter, buoyed by higher gross margin and improved SG&A ratio.

Financial Services

Financial Services segment’s revenues declined 19.7% to $77.0 million in the quarter due to a significant slowdown in the refinance business. Operating earnings of Financial Services were $4.5 million, down from $16.1 million from the prior-year quarter. Operating earnings declined due to lower profit per transaction and a decline in refinance volume in mortgage and title operations.

Rialto Investments  

Rialto Investments’ revenues increased 83.3% year over year to $47.0 million in the quarter, owing to the commencement of the new mortgage loan origination business, Rialto Mortgage Finance. Operating earnings increased from $1.7 million in the prior-year quarter to $2.6 million on higher revenues. Also, the shift from a balance sheet investment company to a fund investment model benefited earnings in the quarter. Both amounts are net of non-controlling interest.

Lennar Multifamily

During the fourth quarter of 2013, the Lennar Multifamily operations were separated from the Homebuilding segment and became an independent segment. Lennar Multifamily is involved in the development of multifamily rental properties in premium markets in California through unconsolidated entities.

Lennar Multifamily revenues increased to $7.8 million in the reported quarter from $297K in the prior-year quarter. The segment incurred a start-up operating loss of $6.2 million in the first quarter compared with a loss of $3.5 million last year owing to increased general and administrative expenses.


The company continues to expect a strong spring selling season for fiscal 2014 on the back of sequential improvement in traffic and new orders.

Lennar Corporation carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

Investors interested in the homebuilding sector can also consider stocks like William Lyon Homes (WLH - Free Report) , Taylor Morrison Home Corp. (TMHC - Free Report) and DR Horton Inc. (DHI - Free Report) . While William Lyon Homes and Taylor Morrison Home Corp. sport a Zacks Rank #1 (Strong Buy), DR Horton carries a Zacks Rank #2 (Buy).

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