On Oct 16, we issued an updated research report on Lennar Corporation (LEN).
On Sep 17, Lennardelivered another strong quarterly result despite soft industry demand, beating the Zacks Consensus Estimate for both revenues and earnings in the third quarter of fiscal 2014.
Earnings of 78 cents per share increased 44.4% year over year driven by double-digit growth in homebuilding revenues and solid margins. Home building revenues grew 25.3% year over year driven by pricing gains and strong deliveries. New home order grew 23% year over year.
At the conference call, management noted that the overall housing market was recovering at a slow but steady pace while order trends were consistent throughout the quarter. Lennar expects to continue to perform well despite the housing market recovering at a slow pace and hopes to achieve another year of strong profits in fiscal 2014.
Overall, Lennar is performing well on the back of its diverse revenue mix, large land supply, above average order growth, better pricing power and consistently strong profit margins.
However, macro headwinds from supply shortage, rising land, material and labor costs and tight credit conditions exist.
A shortage of buildable lots and skilled labor and lack of available capital for smaller builders are limiting home production, thereby lowering inventory of homes, both new and existing. Moreover, rising labor, land and material costs is an increasing margin headwind. As housing starts accelerate, both labor and construction material costs continue to experience an upward pricing pressure.
Nevertheless, we expect Lennar’s profitability to continue to improve on the back of its solid backlog position, rising home prices, strong liquidity position and strategic land acquisitions. Additionally, Lennar’s ancillary platforms — Rialto, Multi-Family, FivePoint and Financial Services — are evolving and are expected to contribute meaningfully from 2015/2016.
Other Stocks to Consider
Lennar carries a Zacks Rank #3 (Hold). Other stocks in the building sector worth considering include Hovnanian Enterprises Inc. (HOV), PGT, Inc. (PGTI) and UCP, Inc. (UCP). While Hovnanian Enterprises and UCP have a Zacks Rank #2 (Buy), PGT sports a Zacks Rank #1 (Strong Buy).
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