Lennar EPS Strong, But Orders, Outlook Below Lofty Hopes

Investor's Business Daily

Lennar (LEN) earnings surged in its fourth quarter, but shares dipped Tuesday after the Miami-based homebuilder reported slower order growth and gave lukewarm guidance on 2013 margins.

Earnings of 56 cents a share for the November-ending quarter swelled 250% from a year earlier and beat views by 12 cents. Excluding an 8-cent tax benefit, profit still topped by 4 cents.

Revenue rose 42% to $1.35 billion, the best gain in years.

CEO Stuart Miller said in a statement that "opportunistic" land acquisitions and greater operating leverage are helping to fuel the firm's "homebuilding machine.

In a post-earnings conference call, Miller said Lennar "invested heavily" in home sites in California and Las Vegas, as well as in Florida and Texas, "two of our strongest markets.

Lennar, one of the largest U.S. builders, delivered 4,443 homes in Q4, up 32% vs. a year earlier.

Total backlog stood at 4,053 homes, up 87%.

New home orders rose 32% to 3,983. That was about in line with views, but a slowdown from 44% in Q3 and 40% in Q2.

Lennar didn't guide on 2013 unit sales. But it expects gross margins on home sales of 23% to 24%. That's around the same as in Q4 and slightly higher than 2012's 22.7%.

Not Through The Roof"The Street was expecting them to be a bit more optimistic," said analyst Megan McGrath of MKM Partners. "To justify homebuilders' (high) valuations you need to assume that orders and margins are going to accelerate from today's levels, and they didn't give us that guidance.

Lennar shares closed down less than 1% after falling 2% intraday. The stock has soared nearly 90% over the last year, hitting a 5-1/2-year high last week.

Most homebuilder stocks have surged as the long-beleaguered housing market began to recover last year. A slew of builders will report quarterly results the next two weeks, including NVR (NVR), MI Homes (MHO), D.R. Horton (DHI) and Ryland (RYL).

"Elevated investor expectations in the face of more difficult order comparisons in 2013 may make further share gains more difficult to come by given (Lennar's) premium valuation," Wells Fargo analyst Adam Rudiger said in a Tuesday note.

Lennar management noted that building costs such as lumber and drywall have risen, as have labor costs. But higher selling prices are offsetting that. In Q4, the average Lennar home rose 7% from a year earlier to $261,000. Miller attributed that largely to pent-up demand and low inventory.

Faster Pace In Late 2013Subcontractors are still reluctant to hire back skilled laborers, McGrath says, noting that the building cycle time has grown by 10 days.

Lennar said its backlog conversion rate in the current first quarter would be around 75%, but rise to 90% in later quarters.

Lennar still expects to end the year with 550 active communi ties, but with new openings heavier in the back half of the year.

The volatile Rialto division, which buys and monetizes distressed real estate, has helped Lennar forge relationships with land sellers, Miller said. But Rialto's operating earnings in Q4 were just $4.6 million, down from $8 million a year earlier.

Rialto's second real estate fund will ramp up in 2013 and should contribute to profits in the latter part of the year, CFO Bruce Gross noted on the call.

Meanwhile, Lennar's more-than-$1 billion new multifamily development pipeline will pick up over the next few years, as will a large California community development program slated for L.A., Irvine and San Francisco.

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