Lennar Corporation Is Building Value For Investors
Rising lumber prices, rising mortgage rates, and tepid housing data cast a pall on shares of Lennar Corporation (NYSE: LEN) but that is turning into a...
Lennar Is A Timely By For The Second-Half
Rising lumber prices, rising mortgage rates, and tepid housing data cast a pall on shares of Lennar Corporation (NYSE: LEN) but that is turning into a buying opportunity. The stock is down about 15% from its recent high but that's about to change. The fiscal second-quarter earnings report blew past all expectations proving that Lennar and the home building industry are still in a golden age. There are hurdles to overcome, but this company is well-positioned to produce sequential and year-over-year growth through the end of this year at the very least.
Nothing Not To Like In Lennar's Q2 Report
After reading through Lennar's fiscal Q2 earnings report we can't find anything not to like. The company's revenue came in at $6.43 billion to grow 21.6% from last year and beat the consensus by 350 basis points. More importantly, this revenue is accelerating sequentially, is up 15% over the past two years, and growth is accelerating on a YoY basis too. The strength was driven by the strength and new orders, the companies still growing backlog, and accelerated starts withIN company-owned communities. Deliveries of new homes surged 14% in the quarter to 4,493 while new orders picked up by 32% in volume and 56% in dollar value.
Moving down the report, the company was able to leverage the market strength and improve margins at all levels. The homebuilding net margin of $1.1 billion is nearly double the previous year outpacing revenue growth by high double-digits. The gross margin on home sales improved 450 basis points to 26.1%, SG&A expenses as a percent of revenue fell 70 basis points, and net margins improved more than 500 basis points to 18.5%.
The bottom line reflects the revenue and margin strength, the GAAP eps of $2.65 and adjusted EPS of $2.95 both beat the consensus estimates by wide margins. GAAP EPS beat by $0.30 while adjusted EPS beat by $0.57 and all this capital is being put to good use. The company's cash and cash equivalents increased to $2.6 billion and it was able to retire $300 million of senior notes due later this year. That action resulted in an upgrade of all of its debt by Standard & Poor's to investment-grade so the company now has investment-grade ratings from all three agencies.
Lennar Corporation Spin-Off Story Gets A Little Sweeter
Lennar Corporation has made several investments in start-up companies over the past few years and recently made the decision to spin them off. According to press releases the company has realized the value embedded in some of its technology investments and would like to benefit from the economic upside of those Investments. The latest news is that, because of the Q2 strength and outlook, the company is contemplating an additional injection of capital into the budding company. There is still no word yet as to when the spinoff will take place but we expect it to be sometime this calendar year.
"We ended the quarter with $2.6 billion in cash, no borrowings on our $2.5 billion revolver and a homebuilding debt to capital of 23.1%, an all-time Company low. With regards to the previously announced potential tax-free spin-off of certain assets, given the strength of the market which has accelerated our earnings and equity growth, we have slowed progress this quarter in order to focus on upsizing the asset base of the businesses we would like to spin-off and are targeting an asset base of $5-$6 billion, compared to $3-$5 billion we discussed last quarter," Said Stuart Miller executive chairman of Lennar Corporation.
The Technical Outlook: Lennar Looks Ready To Move Higher
Shares of Lennar have pulled back from a recent high but now look ready to move higher. Not only do the indicators suggest the pull-back has become overextended but early premarket action suggests the stock is going to move higher today. The question is how high and where the stock closes at the end of the day. A move above the $93 level would be good for the Bulls but we would remain cautious until a break above the short-term moving average.
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