) was the first of the big homebuilders to post healthy margins
more than a year ago as the housing recovery began to show early
signs of a rebound.
And Lennar still has industry-leading margins. But some
observers say they're not good enough.
Gross margin dipped slightly in its fiscal first quarter
ending Feb. 28 to 22.1% from 23.5% in the prior three months.
Moreover, management kept this year's guidance the same as in
the earlier quarter, at 23% to 24%. That disappointed some
"Investors want upside earnings revisions. They didn't hear
that," said analyst Will Randow of Citigroup.
Builders trade on momentum, and any sign that a builder is
losing momentum is not viewed kindly.
Miami-based Lennar is the third-biggest builder, trailingD.R.
) andPulteGroup (
) in revenue.
Though Lennar shares rose 4.8% when it reported what seemed to
be excellent first-quarter fiscal results last week, they've
since fallen to below 42, about where they were before the
Year to date, Lennar's stock "has underperformed peers,"
Randow said in a phone interview this week. "Most builder stocks
are up higher."
), for example is up 15% year to date. D.R. Horton is up 24% year
"Consensus expectations have been rising more for those two
builders," he added.
Since they were later to show margin gains, D.R. Horton,
Ryland and other builders will likely show bigger percentage
gains than Lennar this year, Randow says.
MKM analyst Megan McGrath calls Lennar's gross margin guidance
"somewhat uninspiring" in an environment of rising home
"I thought the gross margin would be higher. Likely, they are
absorbing higher input costs," she said.
Lennar said labor and material costs rose 4% in the quarter,
but that a 9% rise in the average selling price to $269,000
covered the increases.
"We have been increasing prices probably every couple of weeks
in some communities, at least once a month in all communities,"
said Lennar President Richard Beckwitt in the Q1 conference
Lennar reported Q1 net earnings of $57.5 million, or 26 cents
a share vs. $15 million, or 8 cents, a year earlier. Revenue rose
37% to $989.9 million.
Orders in the quarter jumped 34% to 4,055 homes. While the
backlog of homes was up 82% to 4,922 homes, their dollar value
jumped 105% to $1.5 billion.
Analysts polled by Thomson Reuters were expecting 15 cents in
earnings on revenue of $898.4 million.
Driving the upside earnings surprise was $25 million for
reversal of a deferred tax allowance, Randow noted. Pre-tax
income, he added, "missed by a minimal amount."
Rialto Investments, Lennar's subsidiary in distressed real
estate investments, was likely one reason for the slight pre-tax
miss since it's hard to forecast, Randow says.
Rialto generated operating earnings of $1.7 million in the
quarter vs. $9.4 million in the earlier year.
"There is a lot of noise on Lennar's homebuilding operations
vs. non-homebuilding operations," Randow said. "The homebuilding
metrics are all good."
And on the plus side, Rialto puts Lennar on the inside track
to grab good land deals in top locations. Or as Lennar CEO Stuart
Miller put it in the latest conference call: It provides "access
to off-market home sites."
JPMorgan analysts noted in a report that Lennar's willingness
to acquire distressed assets from banks or assets that require
financial remediation have enabled it to gain control of
attractive and larger land parcels in "A" locations.
Lennar said it spent $472 million in Q1 to buy 9,400 home
sites, bringing the total to 135,000 lots owned or
Miller said the company has "land in hand" to meet projected
deliveries through 2014, so current land buying will be for 2015
Beckwitt said the company would probably spend around $500
million on land each quarter for the rest of the fiscal year.
Though land prices have been rising, Lennar is an "astute land
buyer," said Wells Fargo analyst Adam Rudiger.
Lennar says it started buying land when prices were at their
bottom following the housing crash.
"Right now, they're buying land for 2015 and 2016 when
competitors are buying land (at higher prices) for the near
term," Rudiger said.
But a lot of Lennar's land holdings are mothballed, especially
in areas where the housing market has remained moribund. Randow
says about 30% of its lots are waiting out the recovery, or abut
20% of the dollar value of inventory.
Plenty of other active communities are making up for the
mothballed ones. Selling out quickly are projects in Doral near
Miami and various places in California, among others, Randow
"They have a lot of good lots in good locations, which will
likely manifest itself in improving profits," he said.
Analysts expect earnings to show slower growth this year on a
technicality: deferred tax asset allowances, which in effect
offset income taxes, won't be nearly as large this year as last
Earnings will, for the most part, be fully taxed in future
Lennar has pushed profits higher through a cost-savings
"Everything Included" construction program. It, in effect,
abandoned "design studio" customization for a more streamlined
Other construction cost reductions include unbundling material
and labor and reducing floor plan offerings by 60% from the peak.
Cost per square foot has fallen 32% from the peak from $60 to
$41, Lennar said in a recent presentation.
Meanwhile, a new multifamily apartment operation announced
last year is gearing up. But it won't likely affect earnings
until 2014 and only then in a small way, McGrath says.
"But it will certainly be a longer term opportunity," she
Other longer term drivers involve joint ventures in major
projects planned in California, including Hunter's Point and
Treasure Island in San Francisco.