Despite soft margins, Lennar Corporation (LEN) delivered another strong performance, beating the Zacks Consensus Estimate for both revenues and earnings in the fourth quarter of fiscal 2014.
Lennar’s fourth-quarter adjusted earnings of $1.07 per share beat the Zacks Consensus Estimate of 97 cents by 10.3%. Earnings jumped 46.6% year over year driven by an increase in homebuilding revenues.
Total revenue of $2.58 billion beat the Zacks Consensus Estimate of $2.56 billion by 0.8%. Revenues also grew 34.4% year over year as all the segments, particularly homebuilding and multi-family, performed significantly well in the quarter.
Homebuilding Revenues
Homebuilding revenues increased 32.4% year over year to $2.33 billion. Home sales were $2.28 billion in the quarter, up 31.8% year over year, driven by pricing gains and strong deliveries.
New home orders increased 22% year over year to 5,492 in the fourth quarter of 2014. The potential value of net orders increased 24% year over year to $1.8 billion.
New home deliveries, excluding unconsolidated entities, were up 23% year over year to 6,948 driven by demand growth in all the homebuilding segments.
The ASP of homes delivered was $329,000, up 7% year over year. All the operating regions saw sales price increases, excluding Houston.
Backlog grew 21% year over year in the quarter to 5,832 homes. Potential housing revenues from backlog rose 22% year over year to $2.0 billion.
The company increased sales incentives during the quarter owing to an increasingly competitive environment. Lennar’s sales incentives comprised 6.6% of home sales revenues in the fourth quarter, higher than 6.3% in the prior-year quarter and 6% in the previous quarter.
Land Sales
Land sales amounted to $45.6 million in the quarter, significantly up from $21.9 million in the prior-year quarter.
Margins Soft
Gross margin on home sales declined 120 basis points (bps) to 25.6% owing to rising labor, land and material costs and increased incentives, partially offset by higher average sales price of homes delivered and $5.8 million of Chinese drywall settlements. Gross margin on home sales, however, improved 40 bps sequentially.
Selling, general and administrative (SG&A) expenses were $218.6 million in the fourth quarter, up 26.9% from the prior-year period. As a percentage of sales, SG&A expenses however declined 30 bps to 9.6% driven by improved operating leverage.
Operating margin on home sales declined 90 bps to 16.0% during the quarter, owing to softness in gross margins. Sequentially, operating margin on home sales improved 120 bps.
Financial Services
Financial Services revenues increased 38.4% to $138.0 million in the quarter. Operating earnings of the segment were $30.2 million, up 77.6% year over year from $17.0 million in the prior-year quarter, due to higher profit per transaction in title operations and higher origination volume in mortgage operations.
Rialto Investments
Rialto Investments’ revenues of $88.3 million increased 49.7% year over year.
Adjusted operating earnings increased 174.8% to $38.2 million in the quarter due to higher revenues, owing to a receipt of $34.7 million of advanced distribution in relation to its carried interest in Rialto Real Estate Fund I.
Lennar Multi-Family
Lennar Multi-Family revenues increased to $29.4 million in the reported quarter, significantly higher than $1.5 million in the prior-year quarter.
The segment incurred an operating loss of $6.1 million in the fourth quarter, narrower than a loss of $6.5 million in the year-ago quarter due to increased general and administrative expenses.
Fiscal 2014
Lennar’s fiscal 2014 adjusted earnings of $2.80 per share beat the Zacks Consensus Estimate of $2.70 by 3.7%. Earnings jumped 30.2% year over year driven by an increase in homebuilding revenues.
Total revenue of $7.78 billion beat the Zacks Consensus Estimate of $7.72 billion by 0.8%. Revenues also grew 31% year over year on the back of a solid increase in homebuilding revenues.
Outlook
Lennar expects core homebuilding segments to deliver strong revenue and earnings growth in 2015.
Lennar currently carries a Zacks Rank #2 (Buy).
Other Stocks to Consider
Investors interested in the building/construction industry can also consider stocks like DR Horton Inc. (DHI), PulteGroup, Inc. (PHM) and TRI Pointe Homes, Inc. (TPH). All the three companies hold a Zacks Rank #2.
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