We reiterate our Neutral recommendation on Lennar Corp. (LEN), which is engaged in homebuilding and financial services in the U.S. and is considered one of the leading homebuilders within the industry. The Financial Services include mortgage financing, title insurance, closing services and insurance agency services. It also provides Internet and cable television services.
Rialto Investments, Lennar’s most recent venture, provides advisory services, due-diligence, workout strategies, ongoing asset management services, and acquires and monetizes distressed loans and securities portfolios.
Lennar released its financial results on August 19, 2011 for the third quarter of fiscal 2011. The company reported net earnings of $20.7 million or 11 cents per share in the quarter compared with $30.0 million or 16 cents per share in the year-ago quarter. Total revenue in the quarter dropped 1% year over year to $820.2 million, due to poor performance across all the company’s reporting segments, except Rialto Investments.
Lennar’s increased focus on Rialto Investments to offset its weak business results from the Homebuilding and the Financial Services segments paid off well. In the first nine months of fiscal 2011, revenues from the Rialto segment increased 62% year over year while operating income rose 78%, reflecting its high rate of expansion.
Results were driven by close alliances with the Federal Deposit Insurance Corporation (FDIC) and global investment firm Alliance Bernstein. The segment was in a Public-Private Investment Program (PPIP) with Alliance Bernstein. Lennar believes that Rialto has room for further growth with lined-up opportunities from FDIC, banks and others.
Moreover, Lennar’s continuous focus on land purchases and opening of new communities despite the weak economic conditions is worth mentioning. During the last quarter, the company purchased approximately 3,200 well-located home sites valued at approximately $182 million and inaugurated 29 new communities.
The selection of ideal home sites, opening of new communities in the high demanding regions, introduction of energy efficient homes along with the attractive incentive programs for its customers have eventually led to an 11% increase in new orders and a 3% rise in average selling prices for Lennar homes during the most recent quarter.
However, a depressed housing industry is the biggest concern for any homebuilder including Lennar. Prices of houses fell continuously, driven by an excess supply of homes in the face of depressed demand and tough competition from the pre-owned homes.
Furthermore, a deteriorating balance sheet has added to the woes of the company. Lennar’s homebuilding cash and cash equivalents were $800.3 million and net homebuilding debt was $2.33 billion as of August 31, 2011.
Thus, Lennar maintains a Zacks #3 Rank in the short term, which translates into a “Hold” rating.
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