The U.S. homebuilders are now more optimistic about their sales prospects as the recent homebuilder sentiment leaped forward. The National Association of Home Builders/Wells Fargo builder sentiment index released on Aug 15 rose to 68 this month, the highest since May. This reflects an increase of four points from the July reading of 64.
Sales of new single-family homes declined 9.4% in July to a seasonally adjusted annual rate of 571,000. However, the reading for the first seven months of 2017 remained steady at an increase of 9.2% year over year.
Homebuilding companies are depending on steady demand from buyers, borne out by the latest data on groundbreaking for homes. A strong labor market and a soft interest rate regime have ensured consistent gains for homebuilder stocks.
Lennar Corporation (LEN - Free Report) is one such company that continues to show strength in several areas and adding the stock to your portfolio should not be a disappointment. The company is engaged in homebuilding and financial services in the United States.
With assets of more than $12.4 billion, Lennar is one of the best-positioned homebuilders to capitalize on the housing recovery, courtesy of the diverse revenue mix, steady top-line performance, above-average order growth and improving SG&A leverage.
This Zacks Rank #2 (Buy) company has good prospects and should make value addition to your portfolio.
Earnings & Revenues Growth
Arguably, nothing is more important than earnings growth as surging profit levels are often an indication of strong prospects (and stock price gains) ahead for the company in question.
While Lennar has put up a historical (three-five years) EPS growth rate of 11.6%, investors should really focus on the projected growth. Here, the company is looking to grow at a rate of 10.2%.
Lennar remains focused on continued improvement in the SG&A line from operating leverage and investments in technology. In this respect, Lennar plans to reduce SG&A expenses to the range of 9.1-9.3% in 2017. As a percentage of revenues from home sales, SG&A expenses improved to 9.7% in the first half of fiscal 2017, from 9.9% in the year-ago period, due to improved operating leverage as a result of an increase in home deliveries.
Propelling the earnings forward is the company’s solid revenue growth story. After a strong performance in 2014, 2015 and 2016, Lennar delivered outstanding operating results in the first half of 2017.
Thanks to strong demand in housing, Lennar’s total revenue grew 18.1% year over year in the first sixth months of fiscal 2017 on the back of solid homebuilding revenues that increased 15.7%. These were primarily driven by a 14% increase in the number of home deliveries and a 2% rise in the average sales price of homes delivered. Lennar’s core homebuilding results remain consistent with the “slow and steady” housing recovery.
Evidently, its projected sales growth for the current year is 15.4% better than the industry’s average of 8%.
Over the last 90 days, the Zacks Consensus Estimate for current year’s earnings has moved up 1.4%, reflecting six upward revisions against two downward revisions. Also, next year’s earnings estimates inched up 3.2% on the back of six upward revisions against one downward revision. Positive earnings estimate revision indicates analysts’ confidence in the stock and add to the optimism.
Further, Lennar has beaten earnings estimates in each of the trailing four quarters, with an average beat of 11.55%.
Lennar’s trailing 12-month Return on Equity (ROE) is 12.6% compared with the industry average of 10.2%. This indicates that the company reinvests more efficiently compared with its peer group.
Strategic Land Investments
Lennar strategically focused on acquiring low-cost new home sites in well-positioned markets during the downturn, which placed it well to meet growing demand during the upturn, thus giving it a competitive edge over its peers facing land availability constraints.
However, as the housing recovery gains momentum and competition for land assets intensifies, management has decided against purchasing low-margin land assets. Lennar has strategically shifted away from a land-heavy acquisition strategy to acquiring lands with a shorter two to three-year average life. Instead, it wants to focus on slower but more orderly and sustainable growth to improve cash flows and profitability.
In February 2017, Lennar acquired WCI Communities, Inc. With a portfolio of high quality, low cost land and 51 communities, the integration is expected to produce strong gross margin going forward.
Other Key Picks
Other top-ranked stocks in the industry are KB Home (KBH - Free Report) and NVR Inc. (NVR - Free Report) , sporting a Zacks Rank #1 (Strong Buy), and M/I Homes, Inc. (MHO - Free Report) , with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Full-year 2017 earnings for KB Home are expected to increase 51.7%, while that of NVR is likely to rise 33.9%.
M/I Homes is expected to witness 37.1% growth in this year’s earnings.
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