We issued an updated research report on Lennar Corporation LEN on Dec 22, 2015.
On Dec 18, the leading national homebuilder reported fourth-quarter results, surpassing the Zacks Consensus Estimate for earnings but missing the same for sales. Adjusted earnings of $1.21 per share increased 13% year over year driven by improved SG&A leverage and joint venture and other income. Revenues were relatively soft and missed the consensus estimate, though rising 14% on the back of higher selling prices.
After a solid performance in 2014, Lennar delivered outstanding operating results in fiscal 2015. The company is performing decently supported by diverse revenue mix, large land supply and above-average order growth.
With the overall strength in the housing sector as well as the macro environment, the Zacks Rank #3 (Hold) company looks poised for strong performance in 2016.We believe that Lennar is one of the best positioned homebuilders to be able to capitalize on this recovery.
Moreover, its ancillary businesses — Rialto, Multi-Family, FivePoint and Financial Services — are evolving and likely to improve further in 2016. These growing platforms provide diversification as well as complementary long-term growth opportunities.
However, labor shortages, rising land, labor and construction cost and sales slowdown in Houston might put a check on the housing growth momentum in 2016.
A shortage of buildable lots, skilled labor and available capital for smaller builders are limiting home production, thereby lowering the inventory of homes, both new and existing. Limited capital for land and land development has left entitled lands in short supply. The labor market has also tightened with limited availability of labor arresting the rapid growth in housing production. Labor shortages are resulting in higher wages while land prices are inflating due to limited availability. Rising land and labor costs are thus threatening gross margins of Lennar as well as other homebuilders like D.R. Horton, Inc. DHI, PulteGroup, Inc. PHM and KB Home KBH.
Moreover, Lennar witnessed slower order growth in the Houston segment throughout fiscal 2015. Houston/Texas’ economy is dependent on the oil complex which is hurting the region’s overall economy and thereby home sales. The company’s orders declined 12% in the Houston segment in fiscal 2015 which accounts for around 9% of its homebuilding revenues.
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