Why Lennar’s gross margins continue to increase in 2Q14

Market Realist

Lennar's 2nd quarter 2014 earnings: Rising margins and prices (Part 3 of 4)

(Continued from Part 2)

Another increase in a long string of year-over-year increases in gross margins

For the second quarter, gross margins increased 140 basis points, to 25.5%. Last year, second quarter gross margins were 24.1%. Gross margins increased for a variety of reasons—primarily a decrease in sales incentives, an increase in average selling prices, and a greater emphasis on the higher-margin communities—particularly communities where land was purchased after the housing bust. On the cost side, land costs increased, as did labor and materials.

One issue that has bedeviled the builders has been the lack of skilled labor. One of the effects of the long housing bust has been an exodus of skilled construction workers, who were unemployed for so long they found new careers in trucking and the energy sector. As a result, wages are beginning to increase. That increase will crimp margins going forward. Of course, wage increases will be positive for the economy as a whole and particularly the homebuilding sector.

Earnings per share

Lennar reported net earnings of $137.7 million, or $0.61 a share, compared to net income of $137.4 million, or $0.61 a share, a year ago. This year’s number included a tax asset reversal of $41.3 million, which makes the comparison look even better. Lennar Financial Services contributed operating income of $18.3 million, compared to $29.2 million the year before. The slowdown in mortgage origination hasn’t only affected banks, but also builders. Rialto had operating earnings of $13.4 million. Lennar multi-family had start-up costs of $7.2 million.

Balance sheet

Lennar finished the quarter with cash and equivalents of $628 million. The big homebuilders, like D.R. Horton (DHI), Toll Brothers (TOL), PulteGroup (PHM), and KB Home (KBH), have been able to access highly attractive financing terms in the capital markets compared to the smaller builders, which have to rely on bank financing. In the capital markets, it has definitely been a case of the “haves” versus the “have-nots.”

Continue to Part 4

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