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Lennar (LEN) Tops Q1 Earnings, Home Sales Gross Margin Down

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Lennar Corporation (LEN - Free Report) beat expectations for both the counts for the fifth time in a row.

The company’s first-quarter fiscal 2017 adjusted earnings of 59 cents per share surpassed the Zacks Consensus Estimate of 56 cents by 5.4%. Earnings decreased 6.3% from the year-ago level of 63 cents.

The acquisition of WCI Communities, Inc. impacted the company's first-quarter earnings by 3 cents per diluted share, primarily due to one-time transaction expenses.
 

Total revenue of $2.34 billion beat the Zacks Consensus Estimate of $2.20 billion by 6.4%. Revenues also grew 17.6% year over year as the homebuilding, financial services, Rialto and multi-family segments performed significantly well.

Segment Details

Homebuilding Revenues: Segment revenues increased 12.8% year over year to $2.01 billion. Within this, home sales constituted $1.98 billion (up 13.1% year over year) and land sales accounted for $34.9 million (up 9.7%), driven by higher number of homes delivered.

New home orders increased 12% year over year to 6,483 in the fiscal first quarter. The potential value of net orders increased 16% year over year to $3.5 billion.

Home deliveries were up 13% year over year to 5,453 buoyed by higher number of homes delivered across all homebuilding segments, except Homebuilding West that was slightly down from the prior year.

The average selling price ("ASP") of homes delivered was $365,000, flat year over year.

In the quarter under review, backlog grew 17.6% year over year to 9,017 homes. Potential housing revenues from backlog rose 23.9% year over year to $3.5 billion.

The company increased sales incentives during the quarter. Lennar’s sales incentives comprised 5.9% of home sales revenues in the fiscal first quarter, up 30 basis points (bps) year over year but down 30 bps sequentially.

Margins

Gross margin on home sales declined 160 bps to 21.1% owing to rising land and construction costs.

As a percentage of sales, SG&A expenses contracted 50 bps to 10.3% owing to improved operating leverage from increased number of homes delivered and benefits from increased investment in technology.

Financial Services: Financial Services revenues increased 19.5% to $148.0 million in the quarter. Operating earnings at the segment were $20.7 million, up 38.9% due to increased volume and profit per transaction, and title operations.

Rialto Investments: Rialto Investments’ revenues of $82.0 million increased 87.6% year over year.

The segment reported operating earnings of $12 million in the quarter compared with $1.9 million a year ago due to an increase in Rialto Mortgage Finance earnings as a result of higher securitization volume and margins.
 
Lennar Multi-Family: Lennar Multi-Family revenues of $88.7 million increased 124.6% in the reported quarter from $39.5 million in the prior-year quarter.

The segment’s operating income was $19.2 million in the first quarter versus $12.2 million in the year-ago quarter. The improvement was driven by the sale of a property.

Financials

Lennar Homebuilding’s cash and cash equivalents totaled $640.8 million as of Feb 28, 2017, up from $510.9 million as of Feb 29, 2016. Net Lennar Homebuilding debt was $5.14 billion as of Feb 28, 2017, compared with $4.82 billion as of Feb 29, 2016.

Lennar Corporation Price, Consensus and EPS Surprise

 

Other Updates

Lennar acquired WCI Communities on Feb 10, 2017, for approximately $643 million in cash.

Management believes that the solid results in this quarter were supported by an improving macroeconomic environment like renewed optimism, wage and job growth, and consumer confidence following last year's election.

As a result, its homebuilding operations have risen at a faster-than-expected sales pace throughout the fiscal first quarter. In this environment of accelerating sales pace together with limited land and labor, and tight inventory situation, the company believes that it is well positioned for increased pricing power and solid earnings going forward.

Zacks Rank & Other Key Picks

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

Other favorably ranked stocks in the construction sector include PulteGroup, Inc (PHM - Free Report) , NVR, Inc. (NVR - Free Report) and D.R. Horton, Inc. (DHI - Free Report) .

PulteGroup and NVR sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

PulteGroup surpassed earnings estimates in three of the past four quarters, with an average beat of 13.5%. NVR’s earnings are expected to grow 23.6% in 2017.

NVR’s earnings are expected to grow 23.6% in 2017. D.R. Horton, a Zacks Rank #2 (Buy) stock, is expected to witness 16.2% earnings growth in fiscal 2017.

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