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5 Factors That Underscore Lennar's (LEN) Solid Prospects

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Lennar Corporation’s (LEN - Free Report) shares have been rallying since the second-quarter fiscal 2018 release on Jun 26, 2018. In fact, the nation’s largest homebuilder has outperformed the homebuilding industry so far this year. Although Lennar deteriorated 17% year to date, it fared better than the broader industry’s 19.7% decline.

Recently, Lennar posted stellar second-quarter results, surpassing the Zacks Consensus Estimate on both counts. Notably, second-quarter fiscal 2018 was the first full quarter with CalAtlantic. Its top and bottom lines grew considerably, primarily on higher orders, along with improved gross margins and SG&A expenses. Revenues grew 67% as the Homebuilding (up 75.5%), Financial Services and Multifamily segments performed significantly well. Lennar witnessed robust market improvement, aided by 57% increase in deliveries and 62% rise in new home orders (up 79% in dollars).

U.S. homebuilding was quite a rage in 2017, giving investors ample scope to rake in handsome gains. The industry is equally attractive this year, courtesy of solid economic growth and job market. Consistent job growth, growing interest from first-time homebuyers as well as high homebuilders’ confidence are the main factors driving the momentum.

Lennar is one such company that continues to display strength in several areas. Hence, adding the stock to your portfolio should not be a disappointment. Earnings estimates for Lennar have exhibited an uptrend, reflecting optimism in the stock’s prospects. The Zacks Consensus Estimate for the company’s 2018 and 2019 earnings has also been revised upward by 12.2% and 2.5%, respectively, over the past seven days. Let’s delve deeper into the other factors that make this Zacks Rank #2 (Buy) stock a profitable pick. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


What Makes Lennar a Solid Pick?

Solid Growth Prospects: Presently, the problem of adequate supply of land is taking its worst shape, as demand continues to scale up in the homebuilding industry. Given significant pent-up housing demand, Lennar has secured a decent backlog. In the quarter under review, backlog grew 92% from the year-ago quarter to 19,622 homes. Potential housing revenues from backlog increased 114% year over year to $8.6 billion.

Meanwhile, rising land and labor costs are threatening margins of major homebuilders. In this respect, the company has managed to control costs prudently, as is evident from gross margin expansion. The company’s home sales gross margin expanded 10 basis points in the fiscal second quarter.

Lennar has solid growth prospects, as is evident from the Zacks Consensus Estimate for current-year earnings of $5.24 per share, which is expected to grow 37.5% year over year. Meanwhile, the company’s sales are expected to increase by a stellar 64.9% in fiscal 2018. Overall, Lennar constitutes a great pick in terms of growth investment, supported by a Growth Score of B.

Leading Homebuilder: Lennar is considered as one of the leading homebuilders in the United States. The company offers a diversified line of homes for first-time, move-up and active adult homebuyers.

The acquisition of CalAtlantic Group Inc. in February 2018 made Lennar one of the country’s top three homebuilders in 24 of the top 30 U.S. markets. Lennar remains confident that the company will exceed its prior $100 million synergy-savings expectations for 2018 and is on track to meet $365 million synergies for 2019 as well. The latest earnings result also speaks of the synergies that the company is experiencing.

Valuation Looks Rational: Because of homebuilders’ asset-driven nature, it makes sense to value them based on the price-to-book (P/B) ratio. The company currently has a trailing 12-month P/B ratio of 1.3. This is lower compared with the current P/B for the industry and S&P 500 that are pegged at 1.4 and 3.9, respectively. Its lower-than-market positioning indicates that there is room for an upside in the quarters ahead, substantiating its Value Score of B.

Solid VGM Score: The company has an impressive VGM Score of B. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 or 2 make solid investment choices.

Superior ROE: Lennar’s return on equity (ROE) supports its growth potential. Its ROE of 14.2% compares favorably with the industry’s average of 112.4%, implying that it is efficient in using its shareholders’ funds.

Other Stocks to Consider

Other top-ranked stocks in the same space are M.D.C. Holdings, Inc. (MDC - Free Report) , Beazer Homes USA, Inc. (BZH - Free Report) and D.R. Horton, Inc. (DHI - Free Report) .

M.D.C. Holdings sports a Zacks Rank #1 and its earnings for the current year are likely to increase 32.6%.

Beazer Homes, a Zacks Rank #2 stock, is expected to witness 6.5% earnings growth for the year.

D.R. Horton also carries a Zacks Rank #2 and its fiscal 2018 earnings are expected to grow 35.4%.

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