Lennar Order Gains Miss But Higher Prices Offset

Investor's Business Daily

Homebuilder Lennar (LEN) breezed past quarterly earnings views, helped by a spike in home prices, but growth in orders was seen by some as light.

The results from the No. 1 U.S. builder by market cap followed reports earlier this week that new-home sales last month were the highest in six years.

Lennar earned 61 cents a share for its fiscal second quarter, which ended in May. That matched the prior year's result and came in a dime ahead of consensus estimates. Revenue climbed 27% to $1.82 billion, topping views for $1.68 billion.

Shares rose more than 2% intraday but closed off 0.5% at 41.32.

The bottom line was helped by a 14% yearly increase in the average sales price to $322,000, as land scarcity kept inventories tight. The average sales price rose 1.9% sequentially.

Fewer Incentives Given

Lennar's gross margin ballooned 140 basis points from a year ago to 25.5%, ahead of the 25% margin expected by Sterne Agee analyst Jay McCanless.

"We believe higher-than-expected unit closing volumes and a year-over-year decline in (sales) incentives were the reasons for higher gross margins," McCanless noted in a report.

Lennar's Q2 home deliveries rose 12% from a year earlier to 4,987 homes. However, new orders climbed only 8% to 6,183 homes. That was below many analyst estimates, including those of McCanless, who looked for order growth of 10%.

In a statement, Lennar CEO Stuart Miller said the spring selling season "was softer than anticipated." However, he added that the U.S. homebuilding recovery "continued its progression at a slow and steady pace.

"The fundamentals of the homebuilding industry remain strong, driven by high affordability levels, favorable monthly payment comparisons to rentals and overall supply shortages," Miller said. "Demand in most of our markets continues to outpace supply, which is constrained by limited land availability.

The U.S. housing market's recovery had been hampered earlier this year by various headwinds, ranging from higher mortgage interest rates to severe winter weather in many markets.

But sales of new homes reached a seasonally adjusted annual rate of 504,000 in May, the Commerce Department said Tuesday, a gain of 18.6% from April's revised rate. It was the fastest pace in six years and well above estimates for an annual rate of 440,000.

Demand Outpaces Supply

"We believe the report may be a signal that new home demand is improving," McCanless noted.

At May's sales pace, the supply of homes would last 4.5 months — down for the second straight month and flat from a year earlier. The number of homes for sale was flat in May and fell in April. Gains over year-earlier levels are also slowing steadily. That has helped send median prices up nearly 7% annually.

The new-home sales data followed the National Association of Realtors' report Monday that said existing-home sales in May rose 4.9% from a month earlier to an annual rate of 4.89 million.

Existing-Home Supply Rises

Meanwhile, the inventory picture for existing homes looks looser. The number of homes for sale has climbed consistently this year, and the months of supply is 12% higher than a year ago — the most in three years.

"Home buyers are benefiting from slower price growth due to the much-needed, rising inventory levels seen since the beginning of the year," NAR Chief Economist Lawrence Yun said in a statement.

"Moreover, sales were helped by the improving job market and the temporary but slight decline in mortgage rates.

Investors will get more visibility on the housing market when another leading homebuilder, KB Home (KBH), reports fiscal Q2 results before Friday's open.

Analysts expect earnings of 19 cents a share, up from a 4-cent loss a year ago. KB's revenue is seen rising 7% to $563.1 million.

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