Lennar Corporation (LEN - Free Report) is poised to gain from prudent land investment strategies, strength in the housing market, dynamic pricing model and operating efficiency. However, higher construction and land costs pose a threat to margins.
Shares of this homebuilding major have rallied 32.6% so far this year compared with its industry’s collective rise of 28.8%. After a torrid second half of 2018 due to affordability challenges and general housing market uncertainty, Lennar delivered impressive results in first-quarter fiscal 2019. The impressive results can be attributed to the homebuilding market that is stabilizing and redefining in the wake of lower mortgage rates and moderated home prices.
During the quarter, the company’s total revenues improved 29.8% year over year. Precisely, its homebuilding operation registered 36.1% revenue growth, driven by higher number of homes delivered (up 31% year over year) and increased average selling prices or ASP (up 4.3%). Lennar’s core homebuilding results are consistent with slow and steady housing recovery.
Let’s delve into the factors that are driving this Zacks Rank #3 (Hold) stock and see if these can help it sustain its impressive momentum. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Key Growth Drivers
Strategic Land Investments: Lennar is strategically focused on acquiring low-cost new home sites in well-positioned markets during the downturn, which positions it to meet growing demand during the upturn. This provides the company a competitive edge over peers that are facing land-availability constraints.
Although Lennar’s Homebuilding and Financial Services divisions are the primary drivers of near-term revenues and earnings, its Multi-Family business provides diversification as well as complementary long-term growth opportunities.
Dynamic Pricing Model: The company is using its dynamic pricing model, which enables it to set price according to the evolving market conditions. Courtesy of this strategy, Lennar is taking advantage of the strong spring selling season, which is helping it to maximize cash flow and return on inventory.
Lennar ended the first quarter with a sales backlog of 17,259 homes with a dollar value of $7.1 billion. The company is well positioned through 2019 to deliver solid results given this backlog and current housing inventory.
Based on its existing land position, operating strategy and dynamic pricing model, the company expects to deliver between 50,000 and 51,000 homes in 2019 with increased efficiency, improving margins, strong bottom-line growth and cash flow.
Operating Efficiency: The company’s operating margin increased 80 basis points (bps) year over year in the last reported quarter, considering solid growth in core homebuilding operations. As a matter of fact, its core homebuilding earnings are growing at a faster rate than revenues, which indicates increased operating efficiency.
Improved operating leverage, as a result of an increase in home deliveries and benefits from technology initiatives, has enabled Lennar to reduce SG&A expenses in the past three years. In first-quarter fiscal 2019, SG&A expenses, as a percentage of revenues from home sales, improved 20 bps. The company is focused on driving operating costs down to drive the bottom line and cash flow.
Additionally, Lennar continues to focus on opportunistically monetizing non-core assets and business lines to drive efficiencies and enhance cash flow. In the first quarter, it completed the sale of its real estate brokerage business, majority of its retail title business as well as underwriter and retail mortgage business.
The U.S. homebuilding industry faces headwind in the form of ongoing labor crisis, which is exerting pressure on labor costs. Again, higher material cost pressures that stem from tariffs are immediate concerns. In fact, this is a common hurdle for many homebuilding companies like PulteGroup, Inc (PHM - Free Report) , KB Home (KBH - Free Report) and D.R. Horton, Inc (DHI - Free Report) among others.
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