Lennar Corporation (LEN) beat the Zacks Consensus Estimate for both earnings and revenues on the back of the recovering housing market. The housing recovery continued to boost both volume and prices for this leading national homebuilder despite recent concerns among investors about rising interest rates.
Lennar’s second-quarter fiscal 2013 adjusted earnings (excluding deferred tax valuation allowance) of 43 cents per share beat the Zacks Consensus Estimate of 33 cents by 30.3%. Earnings jumped 105% from the prior-year quarter earnings 22 cents.
A double-digit growth in homebuilding revenues and solid margins boosted the earnings growth.
Including the income tax benefits, earnings came in at 61 cents per share against $2.06 per share in the second quarter of fiscal 2012. In the quarter, Lennar reversed $41.3 million of deferred tax asset valuation allowance.
Total revenue in the quarter grew 53.0% year over year to $1.43 billion as both the Homebuilding and Financial Services segments did significantly well in the quarter. Revenues also beat the Zacks Consensus Estimate of $1.32 billion by 8.3%.
Homebuilding revenues grew 59% year over year to $1.28 billion. Home sales were $1.26 billion in the quarter, up 58% year over year driven by both pricing and volume growth in a solid housing market. Home closings, new orders and backlog were all up in double-digits from the year-ago period.
Despite recent increases in mortgage rates, the company witnessed an increased demand in all its markets which suggests a solid recovery in the U.S. housing market. Increased affordability due to higher rentals is boosting demand. Supply however, remains limited by low home inventories, both for new and existing homes. Home prices have thus, moved up sharply with the market demand gaining momentum and supply remaining limited.
New home orders increased 27% to 5,705 homes in the second quarter of 2013 due to increased demand.
New home deliveries, excluding unconsolidated entities, were up 39% year over year to 4,449 homes in the reported quarter. It was driven by an increase in demand in all the Homebuilding segments. The average selling price (ASP) of homes delivered stood at $283,000, up 13.0% year over year.
The backlog grew 55% in the quarter to 6,163 homes. Potential housing revenues from backlog rose 76% to $1.9 billion. The company is witnessing reduced sales incentives in some of its communities. Sales incentives comprised 6.7% of home sales revenues in the second quarter, lower than 10.7% in the prior-year quarter and 8.0% in the first quarter of 2013.
Land sales amounted to $25.1 million in the quarter, up 16.4% year over year.
Lennar has been strategically focusing on acquiring new home sites in higher-margin well-positioned communities and is also buying early stage raw lands. The company has enough land to satisfy deliveries till 2014 and is now pursuing land opportunities for 2015 and beyond. The company’s solid land position places it well to meet growing demands, thus giving it a competitive edge over its peers.
Margins Go Up
Gross margin on home sales expanded 160 basis points (bps) to 24.1% on the back of a rise in ASP, favorable product mix (increased deliveries from higher margin communities) and reduced incentives which offset headwinds from rising labor and material costs.
Selling, general and administrative (SG&A) expenses were $136.6 million in the second quarter of 2013, up 29.6% over the prior-year period. As a percentage of sales, however, SG&A improved 230 bps to 10.9% driven by better operating leverage as volumes improve and absorption per community increases. Operating margin on home sales improved 410 bps to 13.3%, due to improved gross margin and SG&A ratio.
Financial Services segment’s revenues climbed 34.4% to $119.1 million in the quarter driven mainly by increased homebuilding deliveries and robust refinancing transactions. The operating earnings of Financial Services were $29.2 million in the second quarter of 2013 compared with $18.0 million in the prior-year quarter. The improvement in profit was primarily attributable to higher volumes and margins in the segment's mortgage and title operations.
Rialto Investments’ revenues slipped 23.3% to $25.7 million in the quarter, owing to a decline in interest income caused by a decrease in loan portfolios. Operating earnings declined 34.9% year over year to $2.8 million from $4.3 million in the prior-year quarter due to lower revenues. Both amounts are net of non-controlling interest.
The company expects to continue to achieve further profitability in fiscal 2013, despite expectations of higher input costs on the back of increasing demand with continued housing recovery, solid backlog position, rising home prices, strong liquidity position and its strategic land acquisitions.
Other Stocks to Consider
Lennar carries a Zacks Rank #2 (Buy). Lennar has been witnessing solid year-over-year growth in new home orders, ASPs and home closings for the past few quarters. We believe that the company is performing better than its peers by increasing selling prices, improving volumes, making opportunistic land acquisitions and consistently delivering decent profit margins. In addition to its homebuilding operations, growth will also come from its multiple platforms including Rialto, Mutlifamily and Financial Services.
Other stocks in the homebuilding sector that are performing well and deserve a mention include D. R. Horton Inc. (DHI), Ryland Group Inc. (RYL) and Meritage Homes Corporation (MTH), all carrying a Zacks Rank #1 (Strong Buy).
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