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Lennar (LEN) Up 2.3% Since Last Earnings Report: Can It Continue?

A month has gone by since the las t earnings report for Lennar (LEN). Shares have added about 2.3% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Lennar due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recen t earnings report in order to get a better handle on the important catalysts.

Lennar's (LEN) Q4 Earnings Beat, Revenues Miss Estimates

Lennar Corporation reported fourth quarter of fiscal 2018 (ended Nov 30, 2018) results, wherein earnings surpassed the Zacks Consensus Estimate while revenues missed the same.

Management acknowledges that sales continued to be impacted by housing market headwinds like rising mortgage rates and higher home prices. Nonetheless, it believes that underlying fundamentals of lower unemployment, higher wages and low inventory levels remain conducive to the industry.

The company's fourth-quarter adjusted earnings of $1.96 per share topped the consensus mark of $1.91 by 2.6%. The reported figure mainly excludes acquisition and integration costs related to CalAtlantic Group, Inc. as well as the gain on sale of Rialto investment and asset management platform.

Including these items as well as backlog/construction in progress write-up related to purchase accounting, the reported figure came in at $2.42 per share in the quarter, increasing considerably from the year-ago profit level of $1.29.

Total revenues of $6.46 billion missed the consensus mark of $6.53 billion but increased 70.6% year over year as the Homebuilding, Financial Services and Multifamily business segments performed significantly well.

Segment Details

Homebuilding: The segment's revenues increased 77.8% from the prior-year quarter to $6.07 billion, driven by higher number of homes delivered and greater average selling prices. Within the Homebuilding umbrella, home sales constituted $5.95 billion (up 78.5% year over year) and land sales amounted to $114.2 million (up 47.9%).

New home orders increased 44% from the year-ago quarter to 10,611. Potential value of net orders increased 49% year over year to $4.2 billion.

Home deliveries increased 64% from the prior-year quarter to 14,154, buoyed by higher number of homes delivered across all homebuilding segments, courtesy of significant increase in volume resulting from the CalAtlantic acquisition.

The average sales price (ASP) of homes delivered was $421,000, reflecting an 8.5% year-over-year increase.

In the quarter under review, backlog grew 75% from the year-ago quarter to 15,616 homes. Potential housing revenues from backlog increased 85% year over year to $6.6 billion.

Margins

Gross margin on home sales was 21.4% in the quarter. Excluding the above-mentioned backlog/construction in progress write-up, gross margin on home sales was 22.1%, down 30 bps year over year. The decline was due to higher construction costs that were partially offset by an increase in the average sales price of homes delivered.

As a percentage of home sales, SG&A (selling, general and administrative) expenses improved 50 bps to 7.9% from 8.4% a year ago. The improvement was due to improved operating leverage, owing to higher home deliveries. Benefits from technology initiatives also added to the positives.

Financial Services: Financial Services revenues increased 14.9% to $228.3 million in the quarter. Operating earnings at the segment were $58.7 million, up from $42.1 million a year ago.

Rialto Investments: Rialto Investments' revenues of $56 million decreased from $73.4 million a year ago. The segmen t report ed operating loss of $46.4 million in the quarter against earnings of $2.2 million in the year-ago quarter.

Lennar Multi-Family: Lennar Multi-Family revenues of $109.1 million increased from $102.9 million recorded in the prior-year quarter. The segment generated operating earnings of $33 million in the quarter versus $38.6 million a year ago.

Financials

Lennar Homebuilding's cash and cash equivalents totaled $1.34 billion as of Nov 30, 2018, down from $2.28 billion on Nov 30, 2017. Net homebuilding debt of the company was $7.2 billion as of Nov 30, 2018 compared with $4.1 billion recorded in the corresponding period last year.

Rialto

On Nov 30, 2018, Lennar divested its Rialto Investment and Asset Management business segment to Stone Point Capital LLC, a private-equity firm, for $340 million. This Miami-based company retained the Rialto Mortgage Finance business, interests in Rialto fund investments, and other funds as well as investments in Rialto balance sheet assets. Meanwhile, Lennar shifted its Rialto Mortgage Finance unit into the Financial Services business (effective Dec 1, 2018).

Meanwhile, in the fiscal fourth quarter, Lennar contracted to sell Berkshire Hathaway real estate brokerage business, and the majority of retail title business as well as its title insurance underwriter. Both the transactions have completed in the first quarter of fiscal 2019.

Fiscal 2018 Highlights

Adjusted earnings came in at $6.35 per share in the fiscal year. Including the one-time items discussed above, earnings were $5.44 per share compared with $3.38 a year ago. Revenues of $20.6 billion grew 63% and deliveries increased 55% from a year ago. Gross margins on home sales were 19.6%. Adjusted gross margins on home sales came in at 21.8% versus 22.1% a year ago.

Guidance

Owing to the ongoing softness and uncertainty surrounding this seasonally slower time of the year, Lennar deferred its guidance for fiscal 2019.

Fiscal First-Quarter Guidance

The company expects deliveries to be about 9,000-9,500 units and to deliver more than 50,000 homes in fiscal 2019. New orders are expected in the 9,700-10,000 range for the quarter. Average sales price is expected to be about $410,000. Lennar expects gross margin in the range of 20-20.5%.

SG&A expenses for the quarter are estimated within 9.5-9.8%.

The company expects Financial Services to generate earnings within $20-$22 million in the first quarter. Multifamily is expected to generate about $5 million of profits during the quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -20.59% due to these changes.

VGM Scores

At this time, Lennar has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Lennar has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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