Lennar Corporation (LEN, Financial) declared a 21% increase in first quarter 2015 revenue to $1.64 billion, exceeding analyst’s expectations for revenue of $1.5 billion.
Lennar reported 43% increase in first quarter ended February 28, 2015 net earnings of $115.0 million, or $0.50 per diluted share, compared to net earnings of $78.1 million, or $0.35 per diluted share during the same period last year. However, the analysts surveyed by Thomson Reuters had expected 45 cents of earnings per share.
Why Lennar will continue getting better
Lennar is believed to significantly benefit from the early and steady recovery in the housing market conditions driven by a robust backlog of constrained demand for housing that is inhibited by the mortgage market.
The increased demand is primarily due to ongoing production shortage that is expanding at existing production levels. There’s huge improvement in the rental market conditions with enhanced rental rates and small vacancies.
The housing development authorities such as HUD and FHFA are keen on attracting major home buyers with the provisioning of significant consumers' incentive allowed by reduced gas prices and slow improvement in employment and wages environment and with depressed interest rates enabling superior affordability coupled with several years of production shortfall, the housing benefits are seen to be extremely huge.
Strong growth in metrics
The total earnings of Lennar during the first quarter increased 47% on a 21% expansion in revenues. Net revenue from home sales enhanced 23% during the first quarter, allowed by a 20% growth in completely-owned deliveries and approximately 3% boost in average selling price to $326,000 on year-over-year basis.
The solid efforts of the housing development authorities to attract more and more customers to spend significantly in buying new and rented houses is estimated to benefit Lennar considerably, hugely growing its top line and bottom line with enhanced shareholder returns.
Lennar illustrated $12.1 million of gross profits from land sales in the quarter compared to $16.1 million during last year. The unconsolidated subs equity earnings were $28.9 million during the first quarter, primarily driven by the formation of El Toro joint venture, trading about 14 neighborhoods with net 921 home sites during the subsequent section of El Toro. Lennar is believed to develop on four out of the 14 neighborhoods, and therefore Lennar's consolidated profit of $31.3 million only comprises of the portion linked to the 600 home sites traded to third parties.
During this quarter, Lennar introduced 58 fresh communities with a total of 626 dynamic communities, which is an increase of 14% compared to last year. The overall quarterly sales for Lennar remained flat on year-over-year basis with 2.8 sales per community per month.
The impressive growth in home sales for Lennar due to the major strategic joint venture and the accelerated launch of new communities signifies the positive housing market development significantly benefiting the key home makers such as KB Homes and Lennar Corp.
The homebuilder index of Bloomberg jumped to its peak level since July after KB Homes reported 24 percent increase in orders volume for the three months till February and 25 percent expansion in value compared to last year. Further, Megan McGrath, an analyst with MKM Holdings LLC also views an increase in the volume of orders with the key homebuilders having regained the pricing power that they lost by the concluding fiscal year 2014.
Lennar also illustrated 18 percent expansion in new orders to 5,287 homes with approximately 25 percent growth in value to $1.8 billion. In addition, new home deliveries enhanced 19% to 4,302 homes.
The significant increase in the overall volume and value of the new home orders is forecasted to hugely benefit the homebuilders including Lennar Corp. and KB Homes by greatly increasing their profit margins and thus the key shareholder’s value.
Conclusion
Overall, the investors are advised to invest into the Lennar Corporation looking at the impressive company valuations with the trailing P/E and forward P/E ratios of 17.04 and 14.16 respectively and marginally better than the industry’s average P/E of 19.05. The PEG ratio of 1.22 depicts slightly slower company growth and similar to the industry’s average. The profit margin of 8.38% is satisfactory. However, Lennar needs to optimize its hugely debt-laden balance sheet with total debt of significant $6.02 billion against weaker total cash of $1.19 billion only to allow for potential growth investments.
