On May 9, we maintained a Neutral recommendation on
) on the back of solid first-quarter 2013 results and improving
housing fundamentals. However, the overall weak economy and tight
mortgage lending standards keep us on the sidelines.
Why the Neutral Recommendation?
On Mar 20, 2013, Lennar Corporation reported adjusted earnings
(excluding deferred tax valuation allowance) of 14 cents per
share which increased 75% from the prior-year quarter earnings of
8 cents. The earnings growth was driven by a double-digit growth
in homebuilding revenues and solid operating margins. Including
the income tax benefits, earnings were 26 cents per share which
beat the Zacks Consensus Estimate of 13 cents by 100%.
Total revenue in the quarter grew 36.6% year over year to $990
million, driven by both pricing and volume growth in a
stabilizing housing market. Revenues also beat the Zacks
Consensus Estimate of $934 million by 6.0%.
Lennar has been witnessing solid year-over-year growth in new
home orders, average selling prices and home closings for the
past few quarters. Margins have also been above average, despite
rising costs, driven by strong operating leverage. Lennar appears
confident of a significant growth in fiscal 2013 as well.
Estimates mostly moved upwards after announcement of the solid
first-quarter results and the upbeat outlook for 2013. The Zacks
Consensus Estimate for 2013 increased almost 10% and that for
2014 went up 11% over the past 60 days.
Lennar has delivered positive earnings surprises in all the
past four quarters with an impressive average earnings surprise
of 46.4% in the trailing four quarters. We believe that the
company is performing better than its peers by increasing sales
prices, reducing incentives, improving volumes and by making
opportunistic land acquisitions. In addition to its homebuilding
operations, growth will also come from its multiple platforms
including Rialto, Mutlifamily and Financial Services.
Notwithstanding the improving trend, new home demand in the
U.S. remains at historically low levels due to the currently weak
economic conditions and tight mortgage lending standards.
Consumers will remain cautious until the employment scenario
improves, home prices appreciate further and access to the credit
markets eases. Sustainable increases in housing and housing
demand for the long term will require the overall economy to
strengthen, including further job growth which we believe will
Rising input costs is also a concern due to increasing costs
of raw material and labor. As housing starts accelerate,
both labor and construction material costs continue to experience
upward pricing pressure, which could prove to be a major
deterrent for margins in future quarters.
Other Stocks to Consider
Lennar carries a Zacks Rank #3 (Hold). Other stocks in the
homebuilding sector that are performing well and deserve a
D. R. Horton Inc.
Ryland Group Inc.
Meritage Homes Corporation
), all carrying a Zacks Rank #1 (Strong Buy).
D R HORTON INC (DHI): Free Stock Analysis
LENNAR CORP -A (LEN): Free Stock Analysis
MERITAGE HOMES (MTH): Free Stock Analysis
RYLAND GRP INC (RYL): Free Stock Analysis
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