Lennar Corporation: An Attractive Value Stock
Lennar Corporation (NYSE:LEN) is one of the leading American home construction and real estate companies. The company, together with its subsidiaries, owns and operates a few leading brands such as Lennar and CalAtlantic Group. It constructs single-family attached and detached homes as well as multi-family rental units in more than 20 states. Lennars market includes first-time, move-up, active adult and luxury homeowners.
The company operates through the following business segments.
Homebuilding operations, which include Homebuilding East, Homebuilding Central, Homebuilding Texas and Homebuilding West.
Financial services, which provides residential mortgage financing, title insurance and closing services for home buyers.
Multifamily, which develops, constructs and manages multifamily rental properties.
"Other," which includes everything that is not in the three segments above.
Over the last couple of years, Lennar has reported strong revenue growth, aided by the record demand for new houses and the limited supply of new homes that have pushed prices higher.
Strong demand is driving growth
On Sept. 20, Lennar reported its third-quarter financial results, including revenue of $6.9 billion, up 18% year-over-year. Earnings of $3.27 per share compared favorably against consensus estimates of $3.24 per share.
The company delivered 15,199 homes in total, up 10% year-over-year, but 600 homes below its projection due to supply chain challenges such as a shortage of building materials and skilled labor. Rising prices were also a factor. Home sales revenue grew 19% year-over-year to $6.5 billion in the third quarter of 2021, driven by the increase in the number of home deliveries and an increase of 8% in the average sales price.
The Financial Services segment reported $111.9 million in operating earnings, compared to $135.1 million in the third quarter of 2020. The decline in earnings was due to lower mortgage net margins, partially offset by increased volume and an increase in profit per transaction from technology initiatives. In the third quarter, the Multifamily segment recorded a loss of $9.4 million, and the operating earnings of the Lennar Other segment came to $492.0 million, up from $8.0 million in the corresponding quarter of last year. At the end of the quarter, the company had a cash balance of over $2.6 billion.
Although the company missed guidance due to limited supplies, demand remained very strong and is projected to continue to be so in the coming years. The company expects supply chain challenges to be a problem in the fourth quarter as well. However, industry experts believe the supply chain conditions will improve in 2022 and that Lennar's market position and current demand would result in meaningful growth. According to Research and Markets, the U.S. construction industry is expected to grow by 3.7% in 2022. Investors, however, should keep a close eye on supply chain challenges and increasing housing prices, as these could wither the growth of the residential construction sector.
In addition to its core business, Lennar is taking strategic steps to increase shareholder value through partnerships. On Oct. 26, Lennar announced a partnership with ICON, a construction technology company innovating large-scale 3D printing, to embrace the latest digital trends loved by homeowners. Through this partnership, Lennar plans to build a 100-home community that will be co-designed by the renowned architecture company, BIG-Bjarke Ingels Group. The company also announced a partnership with Veev on Nov. 18 to build a 102-home community using Veevs vertically integrated end-to-end panelized building technology.
Valuation
With housing demand remaining strong, Lennar has experienced strong growth in revenue in recent quarters. The market has not been oblivious to this growth as well, which is evident from the 50% gain in its stock price this year. Even after this stellar performance in the market, Lennar Corporation is still valued at a forward price-earnings ratio of just 9, which suggests there is more room for the stock to grow given that the company is continuing to benefit from favorable macroeconomic conditions. Investors, however, should keep a close eye on the mortgage rate along with supply chain conditions to identify a potential inflection point.
This article first appeared on GuruFocus.
