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Lennar: Homebuilding Revenues Solid, Margins Remain Weak

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On Dec 1, we issued an updated research report on Lennar Corporation (LEN - Free Report) – primarily engaged in homebuilding and financial services in the U.S. along with multiple ancillary businesses.

Lennar is one of the best positioned homebuilders to capitalize on the housing recovery, courtesy of its diverse revenue mix, steady top-line performance, above-average order growth and improving SG&A leverage. Moreover, the company’s ancillary platforms — Rialto, Multi-Family, FivePoint and Financial Services — are fast evolving and should improve further.

Lennar has a decent earnings history wherein it surpassed estimates in all of the past four quarters, resulting in an average positive surprise of 13.29%. This Miami-based company maintained its strong performance in third-quarter 2016 as well, beating the Zacks Consensus Estimate for both earnings and sales. In the third quarter of 2016, the company posted a positive earnings surprise of 14.8%.

Despite the varied product portfolio, homebuilding remains Lennar’s core business. Homebuilding operations accounted for 85% of fiscal 2015 total revenue. Homebuilding revenues rose 16% in the first nine months of 2016, backed by double-digit increase in home deliveries and higher average selling price (ASP) of homes. Homebuilding operating earnings increased 9% in the first three quarters of 2016. Lennar’s core homebuilding results remain consistent with the “slow and steady” housing recovery.

However, trends at Lennar’s Houston segment have particularly slowed down, mainly at higher price points in the wake of the oil slide. Houston accounts for around 9% of its homebuilding revenues. Texas’ economy is dependent on the oil complex and the volatility in the energy sector is hurting the region’s overall economic growth and, in turn, home sales. The company’s orders declined 12% at the Houston segment in fiscal 2015 and 7.5% in the first nine months of 2016 due to lower demand.

Going forward in 2016, management is moderating its focus on top-line growth targets to achieve 7% to 10% growth in order to maximize profits and cash flow.

Lennar expects gross margin of about 23.25% for fourth-quarter 2016, down from its previous forecast of 23.5–24%. Rising land and labor costs are a threat to margins as they limit homebuilders’ pricing power.

The company is on track to achieve the lowest SG&A percentage in its history in 2016. Lennar expects its fourth quarter to see a 50 basis point reduction from the third quarter’s 9.3%, reaching the figure to around 8.8%.

Zacks Rank & Key Picks

Lennar currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the construction sector include Gibraltar Industries, Inc. (ROCK - Free Report) , Hovnanian Enterprises Inc. and AAON, Inc. (AAON - Free Report) .

Gibraltar sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here

Full-year 2016 earnings for Gibraltar are expected to grow 44.9%.

Hovnanian, a Zacks Rank #2 (Buy) stock, is likely to witness 190.9% growth in fiscal 2016 earnings.

AAON carries a Zacks Rank #2. Full-year 2016 earnings for the company are expected to rise 21.4%.

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