We have issued an updated research report on Lennar Corporation LEN on Jul 1, 2015.
After the solid first-quarter performance, the Zacks Rank #1 (Strong Buy) company reported strong second-quarter results on Jun 24. The Miami, FL-based company beat the Zacks Consensus Estimate for both revenues and earnings in the second quarter. Adjusted earnings of 79 cents per share improved 30% year over year driven by solid revenues and improved SG&A leverage. Revenues jumped 31.3% on increased orders, home closings and higher ASPs. Moreover, the company increased its home delivery expectations for 2015.
According to Lennar, housing recovery continued at a steady pace in the second quarter. Management believes that the housing market is slated for a multi-year slow but steady recovery on the back of higher job numbers, an improving economy, moderating home price gains, affordable interest/mortgage rates, rising rentals and limited supply of inventory.
We believe Lennar is one of the best positioned homebuilders to be able to capitalize on this recovery on the back of diverse revenue mix, large land supply and above-average order growth.
Moreover, its ancillary businesses — Rialto, Multi-Family, FivePoint and Financial Services — are evolving and should see further improvements, going ahead. These growing platforms provide diversification as well as complementary long-term growth opportunities.
However, gross margin pressures due to rising land and construction cost amid moderating home price increases are the concerns. Both labor and construction material costs are rising proportionally with the increase in housing starts and there could be significant inflation, going forward. Labor and material costs increased 7% in the second quarter.
This could eat into homebuilders’ margins considering that home price increases are moderating.
Other Stocks to Consider
Other homebuilders worth considering are Beazer Homes USA Inc. BZH, Pulte Group Inc. PHM and D.R. Horton, Inc. DHI. While Beazer Homes sports the same Zacks Rank as Lennar, Pulte and D.R. Horton have a Zacks Rank #2 (Buy).
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