Lennar Corporation (LEN) beat the Zacks Consensus Estimate for both earnings and revenues in the third quarter of fiscal 2013, for the fifth quarter in a row.
Lennar’s third-quarter fiscal 2013 adjusted earnings (excluding deferred tax valuation allowance) of 54 cents per share beat the Zacks Consensus Estimate of 46 cents by 17.4%. Earnings increased 35% from the prior-year quarter earnings of 40 cents driven by double-digit growth in homebuilding revenues and solid margins.
Total revenue in the quarter grew 46.0% year over year to $1.6 billion driven by revenue growth in the Homebuilding segment. Revenues also beat the Zacks Consensus Estimate of $1.57 billion by 1.9%.
Homebuilding Revenues
Homebuilding revenues grew 53% year over year to $1.46 billion. Home sales were $1.45 billion in the quarter, up 55% year over year, driven by both pricing and volume growth in a solid housing market.
With the recent improvement in economic conditions and the housing market in general, mortgage rates are edging upwards to more normalized levels. Despite the rising interest rates, the company witnessed an increased demand in all its markets and was able to push pricing further.
New home orders increased 14% to 4,785 homes in the third quarter of 2013. However, net order growth declined sequentially which we believe is due to a “moderating sales pace.” The dollar value of new home orders grew 32% to $1.5 billion.
New home deliveries, excluding unconsolidated entities, were up 37% year over year to 4,972 homes in the reported quarter. It was driven by an increase in demand in all the Homebuilding segments. The average selling price (ASP) of homes delivered stood at $291,000, up 13.0% year over year.
The backlog grew 32% in the quarter to 5,958 homes. Potential housing revenues from backlog rose 53% to $1.9 billion. The company is witnessing reduced sales incentives in some of its communities. Sales incentives comprised 6.0% of home sales revenues in the third quarter, lower than 9.2% in the prior-year quarter and 6.7% in the second quarter of 2013. Cancellation rate was 18% in the quarter.
Land Sales
Land sales amounted to $14.0 million in the quarter, down 39% year over year. The company has enough land to satisfy deliveries until 2014 and is now pursuing land opportunities for 2015 and beyond. The company’s solid land position places it well to meet growing demands, thus giving it a competitive edge over its peers.
Margins Go Up
Gross margin on home sales expanded 170 basis points (bps) to 24.9% on the back of a rise in ASP, favorable product mix (increased deliveries from higher margin communities) and reduced incentives which offset headwinds from rising labor and material costs. Gross margin was slightly better than management’s expectation of 24.25%.
Selling, general and administrative (SG&A) expenses were $148.3 million in the third quarter of 2013, up 32.2% over the prior-year period. As a percentage of sales, however, SG&A improved 180 bps to 10.2% driven by better operating leverage as volumes improve and absorption per community increases. Operating margin on home sales improved 350 bps to 14.7%, due to improved gross margin and SG&A ratio.
Financial Services
Financial Services segment’s revenues climbed 5.5% to $112.6 million in the quarter. The operating earnings of Financial Services were $23.5 million in the third quarter of 2013 lower than $25.3 million in the prior-year quarter due to lower volumes in the mortgage operations.
Rialto Investments
Rialto Investments’ revenues slipped 25.3% to $27.8 million in the quarter, owing to a decline in interest income caused by a decrease in loan portfolios. Operating earnings declined 80.5% year over year to $1.5 million from $7.7 million in the prior-year quarter due to lower revenues. Both amounts are net of non-controlling interest.
Outlook
Management highlighted that the home sales pace was moderating. Chief Executive Officer Stuart Miller also talked about "bumps along the road" that could hurt short-term demand, possibly indicating at the recent increases in interest/mortgage rates. However, Miller seemed confident of seeing strong demand over the long term due to supply shortages.
While high affordability levels, increased rentals and historically-low interest rates are increasing the housing demand, supply remains limited by low home inventories, both for new and existing homes. A shortage of land and labor is restricting the production of homes.
Home prices have thus started moving up with market demand gaining momentum but supply remaining limited. In fact, rising home prices and thinning home inventories have created a sense of urgency among homebuyers to buy a house before prices shoot up further.
The company expects profitability to improve on the back of its solid backlog position, rising home prices, strong liquidity position and strategic land acquisitions. In addition to its homebuilding operations, growth is also expected to come from its multiple platforms including Rialto, Mutlifamily and Financial Services.
Other Stocks to Consider
Lennar carries a Zacks Rank #3 (Hold). Other stocks in the homebuilding/building products sector that are performing well and deserve a mention include Standard Pacific Corp. (SPF), Masco Corp. (MAS) and CaesarStone Sdot-Yam Ltd. (CSTE). While SPF and MAS carry a Zacks Rank #2 (Buy), CSTE carries a Zacks Rank #1 (Strong Buy).
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