Lennar Corp: Have We Reached the Top of the Cycle?

US homebuilder posts revenue and earnings beats, but mortgage rates are climbing

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Margaret Moran
Mar 17, 2021
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After the markets closed on March 16, Lennar Corp. (

LEN, Financial) reported earnings results for its first quarter of fiscal 2021, which ended Feb. 28.

The U.S. homebuilder reported revenue and earnings that both beat what analysts were expecting. Shares gained about 2% the following morning to trade around $90.53 in response to the news.

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Earnings results

For the quarter, the company recorded adjusted earnings per share of $2.04 compared to $1.27 in the prior-year quarter. Revenue was $5.33 billion, which also surpassed the prior-year quarter revenue of $4.51 billion. These numbers beat analysts' estimates by 23.64% on the adjusted earnings front and by 4.92% on the revenue front. This marks the fourth quarter in a row of earnings per share beats for the company.

Non-adjusted earnings were $3.20 per share due to the outsized effect of a pretax gain of $469.7 million resulting from the company's Opendoor Technologies Inc. (

OPEN, Financial) investment going public during the quarter.

The majority of metrics showed strong year-over-year improvement, with home deliveries up 19%, new orders up 26% and a 25% increase in the backlog (with backlog dollar value up 32%). Gross margin on home sales reached 25.0% compared to 20.5% a year ago, while net margin was 16.6% compared to 11.4%.

For the financial services segment, operating earnings of $146.2 million more than doubled the $58.2 million reported a year ago.

The company made no borrowings under its $2.5 billion revolving credit facility and managed to reduce the ration of homebuilding debt to total capital from 33.6% down to 24.0%.

Co-CEO and Co-President Jon Jaffe had the following to say about the quarter:

"We have been and continue to be very focused on production costs and cycle times as the homebuilding industry ramps up to meet growing demand. Our focus on our trade partner relationships together with our size and scale have enabled us to maintain consistent production while we match cost increases with pricing power to maintain margin in the first quarter. Lennar is also uniquely positioned with our production-oriented Everything's Included business model to navigate the industry supply challenges."

Looking forward

One of the main drivers of growth in demand for new homes over the past year has been lower mortgage rates. The ability of homeowners to refinance their mortgages at lower rates has also been a boost to related financial services.

However, according to the Mortgage Bankers Association's seasonally adjusted index, applications to refinance a home loan fell 4% for the week and 39% year over year. Interest rates have jumped 36 basis points since the end of January, as not even the Federal Reserve's incredibly dovish stance can keep rates down forever in the face of upwards pressure.

Mortgage applications to purchase a home still increased 2% for the week and were 5% higher year over year, but this still represents a slowdown. In addition, skyrocketing home prices are causing increasing numbers of buyers to hit a price wall. February saw mortgage applications for newly built homes fall 9% compared to the previous month for this reason.

For the second quarter of fiscal 2021, Lennar guides for 16,500 to 16,700 new orders, 14,200 to 14,400 deliveries and financial services operating earnings of $100 million to $105 million. For full fiscal 2021, the company estimates 62,000 to 64,000 deliveries and financial services operating earnings of $445 million to $460 million. Gross margin as a percent of home sales is expected to remain near 25%.

Valuation

With noticeable declines in the growth of new mortgage and refinancing applications as home prices soar, it seems like the tailwind that has pushed the results of Lennar and other U.S. homebuilders over the past year may be beginning to dwindle.

On the one hand, the stock has a price-earnings ratio of 11.85, which is below the industry median of 13.8 and its own 10-year median of 14.64. However, homebuilders are highly cyclical, which often means that when the price-earnings ratio is low, it might not be reliable as a buy signal. According to the GuruFocus Value chart, the stock is significantly overvalued at current levels.

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Wall Street is currently predicting that Lennar will post adjusted earnings of $2.26 per share and revenue of $6.21 billion for the second quarter of 2021. A miss here could easily bring the share price down.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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