Though Lennar Corporation (LEN) managed to beat the Zacks Consensus Estimate on both counts in fiscal third quarter of 2014, its orders declined sequentially
Lennar’s third-quarter fiscal 2014 adjusted earnings of 78 cents per share beat the Zacks Consensus Estimate of 67 cents by 16.4%. Earnings jumped 44.4% year over year driven by double-digit growth in homebuilding revenues and solid margins.
Total revenue of $2.01 billion beat the Zacks Consensus Estimate of $1.94 billion by 3.6%. Revenues also grew 25.6% year over year as all the segments, particularly homebuilding, performed significantly well in the quarter.
Homebuilding Revenues
Homebuilding revenues increased 25.3% year over year to $1.83 billion. Home sales were $1.81 billion in the quarter, up 24.8% year over year, driven by pricing gains and increase in number of homes delivered.
New home orders increased 23% year over year to 5,889 homes in the third quarter. The potential value of net orders increased 28% year over year to $1.9 billion.
However, Lennar’s net orders declined about 5% sequentially. Another homebuilder Toll Brothers, Inc. (TOL) also saw a sequential decline in orders in the third quarter 2014, reported on Sep 3. However, homebuilder KB Home (KBH), which is due to report its third quarter 2014 earnings results, next week, reported strong orders in the first two quarters of fiscal 2014.
New home deliveries, excluding unconsolidated entities, were up 9.6% year over year to 5,450 homes in the reported quarter. The increase was driven by demand growth in all the homebuilding segments.
The ASP of homes delivered was $332,000, up 14.1% year over year and 3.1% sequentially. All the operating regions saw sales price increases, excluding Houston.
Backlog grew 22% year over year in the quarter to 7,290 homes. Potential housing revenues from backlog rose 29% year over year to $2.5 billion.
The company reduced sales incentives during the quarter. Sales incentives comprised 5.8% of home sales revenues in the third quarter, lower than 6% in the prior-year quarter and 5.9% in the prior quarter.
Land Sales
Land sales amounted to $19.4 million in the quarter, significantly up from $14.0 million in the prior-year quarter.
The company has enough land to fulfill deliveries well into 2015. The company’s solid land position places it well to meet the growing demand, thus giving it a competitive edge over its peers.
Increased Margins
Gross margin on home sales expanded 30 basis points (bps) to 25.2% on the back of a rise in ASP and reduced incentives, which offset headwinds from rising labor, land and material costs. Gross margin exceeded management’s expectation of a high 24% range.
Selling, general and administrative (SG&A) expenses were $188.0 million in the third quarter, up 26.8% over the prior-year period. As a percentage of sales, SG&A expenses rose 20 bps to 10.4%, driven by higher broker commissions and higher number of communities.
Operating margin on home sales improved 10 bps to 14.8% during the quarter, buoyed by strong pricing power and better operating leverage.
Financial Services
Financial Services segment revenues increased 14% to $128.4 million in the quarter. Operating earnings of Financial Services were $27.1 million, up 15.3% year over year from $23.5 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 $40.8 million increased 46.8% year over year driven by revenues from Rialto Mortgage Finance and interest income from real estate loans and an increase in fees for managing and servicing assets.
Operating earnings increased 726.7% to $12.4 million in the quarter due to higher revenues.
Lennar Multi-Family
Lennar Multi-Family revenues increased to $14.0 million in the reported quarter, significantly higher than $0.7 million in the prior year quarter.
The segment sold its first two apartment properties during fiscal third quarter of 2014. The company presently has $5 billion worth of multifamily products in its pipeline and expects the segment to drive quarterly earnings from late 2015 and 2016.
Outlook
Lennar remains optimistic about the recovery of the housing market. The company expects all its segment to do well in the upcoming quarters.
Lennar carries a Zacks Rank #3 (Hold).
A better ranked stock in the building related sector is Boise Cascade Company (BCC), sporting a Zacks Rank #2 (Buy).
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