It has been about a month since the last earnings report for Lennar (LEN). Shares have added about 3.7% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.
Lennar's Q2 Earnings Beat, Revenues Miss Estimates
Lennar Corporation reported better-than-expected results for second-quarter fiscal 2020 (ended May 31, 2020), defying unprecedented health crisis and significant business disruption over the past three months. This marks the fifth consecutive quarter of an earnings beat. The results mainly benefited from effective cost control and focus on making its homebuilding platform more efficient, which in turn resulted in higher operating leverage.
Stuart Miller, executive chairman of Lennar stated, “While unemployment increased throughout the quarter due to impacts from the COVID-19 pandemic, customers moved from rental apartments and from densely populated areas to purchase homes, and home sales grew steadily, as record-low interest rates and low inventory levels drove a favorable rebound in the homebuilding industry.”
The company reported quarterly earnings of $1.65 per share, handily surpassing the Zacks Consensus Estimate of $1.29 by 27.9%. Also, the reported figure jumped 27% from $1.30 in the year-ago quarter. The upside was mainly driven by higher cost control and continued operating leverage, backed by technological efforts. Revenues of $5.29 billion missed the consensus estimate by 0.03%. The reported figure also decreased 5% year over year.
Homebuilding: Revenues at the segment totaled $4.95 billion, down 5% from the prior-year quarter. The downside was due to lower average sales price or ASP of homes delivered. Within the Homebuilding umbrella, home sales contributed $4.93 billion to total revenues, down 4.8% from a year ago, while land sales accounted for $19.8 million, up 20.5%.
Home deliveries during the reported quarter remained on par with the year-ago level at 12,653 units as a result of the coronavirus pandemic and economic shutdown. The average sales price of homes delivered was $389,000, reflecting a 4% year-over-year decline owing to continued shift to lower-priced communities and regional product mix due to stay-at-home orders in certain higher-priced markets. New orders declined 10% from the year-ago quarter to 13,015 homes. The potential value of net orders also decreased 16% year over year to $4.9 billion.
Backlog at fiscal second quarter-end decreased 6% from a year ago to 17,975. Potential housing revenues from backlog also declined 8% year over year to $7.1 billion.
Gross margin on home sales was 21.6% in the quarter, up 150 basis points (bps). The upside can be attributed to its efforts toward reducing construction costs. Selling, general and administrative or SG&A expenses — as a percentage of home sales — improved 10 bps to 8.3% on improved operating leverage. Operating margin on home sales also improved 170 bps year over year to 13.3% in the quarter.
Financial Services: The segment’s revenues decreased 3.9% year over year to $196.3 million in the reported quarter. That said, operating earnings came in at $150.6 million, up from $62.5 million a year ago on strong mortgage business owing to higher volumes and margins.
Lennar Multi-Family: Revenues of $123.1 million at the segment decreased 16.5% from the prior-year quarter. However, the segment incurred operating loss of $0.638 million in the quarter, narrower than $4.322 million loss a year ago.
Lennar Other: The segment’s revenues totaled $18.5 million, up 18.2% from $15.7 million a year ago. Operating loss was $18 million during the quarter versus operating earnings of $1.8 million in the comparable period of 2019.
Lennar had homebuilding cash and cash equivalents of $1.4 billion as of May 31, 2020, up from $1.2 billion on Nov 30, 2019. Total homebuilding debt was $7.5 billion as of May 31, 2020 compared with $6.58 billion on Nov 30, 2019. Total homebuilding debt to capital at the end of the fiscal second quarter was 31.2% compared with 32.8% at fiscal 2019-end.
For the fiscal third quarter, Lennar expects deliveries in the range of 13,200-13,400 homes; ASP within $38,000-$385,000; homebuilding gross margin in the 21.5%-21.75% band; and homebuilding SG&A of 8.3-8.5%. New orders are expected within 12,800-13,000.
For the fiscal fourth quarter, it expects deliveries in the range of 14,300-14,600 homes; ASP of $38,000; homebuilding gross margin in the range of 21.75-22%; and homebuilding SG&A of 8%. New orders are expected within 12,000-12,250.
For fiscal 2020, the company expects deliveries in the range of 50,500-51,000 homes, with a gross margin on home sales of 21.5% and net margin on home sales of 13%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision.
At this time, Lennar has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% 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.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Lennar has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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