We maintained a Neutral recommendation on Lennar Corporation (LEN) following appraisal of first quarter 2012 results.
Lennar Corporation reported adjusted earnings of 8 cents per share in the first quarter of fiscal 2012 compared with an adjusted loss of 5 cents per share in the year-ago quarter. The earnings growth was driven by improved revenues and operating margins. Earnings surpassed the Zacks Consensus Estimate by 60%.
Total revenue in the quarter climbed 30% year over year to $724.9 million driven by strong performance from both the homebuilding and financial services segments. Revenues were also above the Zacks Consensus Estimate of $698.0 million.
Revenues from the Homebuilding segment rose 33% year over year to $610.7 million. This was attributable to improved sale prices and an impressive net order increase.
Lennar is considered to be a leading homebuilder in the U.S. The company offers a diversified line of homes for first-time, move-up and active adult homebuyers. Lennar strategically focuses on acquiring higher-margin, well-positioned communities and avoids the fringe or tertiary markets where price is the only driver.
The company’s focus on the quality of communities instead of quantity is benefiting its margins and new sales orders. This is a clear differentiating factor for Lennar, giving it a competitive advantage versus peers. Further the Rialto segment is progressing well and has incremental growth opportunities as the market continues to improve.
In the interim, the homebuilding market faced a severe crisis following the economic downturn of 2006-2007. Lennar management believes the housing market has begun to see signs of stabilization in fiscal 2011, particularly in the most sought after high-end communities.
The management believes that stability in the home buying market, combined with low interest rates and low home prices, has increased the affordability of homes. These factors led to an almost 5% increase in new home orders for the company in fiscal 2011.
Overall, the company is faring better than its peers by increasing sales prices, reducing incentives, and achieving overhead leverage on volume expansion. The average selling price for Lennar’s homes stood at $244,000 at the end of fiscal 2011 versus $243,000 in both 2009 and 2010.
Backlog (number of homes under sales contracts) at the end of the year also climbed 35%, reflecting growing demand. Further, the management is optimistic about the company’s capacity to sustain its growth and feels that the strong balance sheet, significant liquidity and efficient management team will help the company to capitalize on opportunities.
However, we believe that the stabilization process in the housing market is erratic and not yet adequately broad-based. The housing market improvement has been uneven across the country. Home sales for Lennar have fallen consistently from peak 2006 levels. Prices of houses also fell continuously, driven by an oversupply of homes in the face of depressed demand. Tough competition was offered by existing homes, foreclosed homes and rental housing. In addition, many home purchasing contracts are still being cancelled due to increasing difficulty in obtaining loans for the purpose. Though demand trends are slowly improving, a speedy recovery is unlikely. We thus prefer to remain on the sidelines until we witness a substantial recovery in the homebuilding market.
LENNAR CORP -A (LEN): Free Stock Analysis Report
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