Lennar Corporation’s (LEN) adjusted earnings of 21 cents per share in the second quarter of 2012 beat the prior-year quarter earnings by 14 cents on the back of solid new order growth. Earnings also surpassed the Zacks Consensus Estimate by 5 cents.
Total revenue in the quarter climbed 22% year over year to $930.2 million on the back of pricing and volume gains. Revenue, however, lagged the Zacks Consensus Estimate of $946 million.
Homebuilding
Revenues from the Homebuilding segment was $808.1 million, up 22% year over year. The increase in segment revenue was due to a 20% rise in the number of homes delivered excluding unconsolidated entities and 2% increase in the average sales price. The company generated $796.5 million from the sales of homes, up 23% year over year and $11.6 million from the sale of land, down 8.7% year over year.
The company reported new orders of 4,481 homes in the quarter, up 40% year over year, owing to a recovering market, backed by low home prices and interest rates.
Gross margin on home sales improved to 22.5% in the quarter, up 310 basis points year over year. The margin growth was triggered by lower sales incentives to homebuyers (as a percentage of home sales).
Financial Services
Financial Services segment revenues was $88.6 million in the second quarter of 2012, up 49.2% from the year-ago period. The segment posted operating earnings of $18 million compared with $2.5 million in the year-ago period, fueled by increased volumes in mortgage and title operations.
Rialto Investments
Rialto Investments revenues slipped 21.4% to $33.5 million in the second quarter of 2012. Operating earnings were down 56% year over year to $4.3 million compared with $9.8 million in the same period last year as the company concentrates on the sale and resolution of assets to maximize value.
Financial Position
Lennar had cash and cash equivalents of $667.1 million from homebuilding as of May 31, 2012, compared with $1.02 billion as of November 30, 2011. Net debt from homebuilding amounted to $2.80 billion as of May 31, 2012, reflecting a net debt-to-capitalization ratio of 46.9%.
Our Recommendation
Overall, we are encouraged by the company’s impressive first half results and improved profitability. We believe that the company is performing better than its peers by increasing sales prices, reducing incentives, improving volumes and investing in well positioned high-margin communities. However, despite management’s optimism regarding improving home demand trends, we believe that the overall housing recovery will be slow.
Currently, we have a Neutral recommendation on Lennar Corporation. The company holds a Zacks #3 Rank (short-term Hold rating). One of its peers, Toll Brothers Inc. (TOL) presently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating.
Based in Miami, Florida, Lennar Corporation is engaged in homebuilding and financial services in the US. Lennar offers multi level residential buildings, single-family attached and detached homes, communities and suburban communities, communities with golf course etc. It operates through three segments, homebuilding, financial services and Rialto Investments.
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