U.S. Markets closed

Can Lennar Counter Cost and Macro Headwinds?

Zacks Equity Research

On Jul 10, we issued an updated research report on Lennar Corporation (LEN).

On Jun 26, Lennar reported strong second-quarter fiscal 2014 results, beating the Zacks Consensus Estimate for both earnings and revenues. Earnings of 61 cents per share increased 41.9% year over year driven by strong pricing power and solid margins. Home building revenues grew 29% year over year as strong pricing gains made up for softer orders. New home order grew 9% year over year but declined slightly from last quarter due to a softer spring selling season than was expected.

Though rising interest rates and home prices, supply shortage and inclement weather hurt housing activity in the past few months, Lennar is hopeful of recovery in the upcoming quarters.

Overall, the company is performing better than peers due to its solid land portfolio, better pricing power and consistently strong profit margins.

However, macro headwinds from supply shortage, rising land, material and labor costs and tight credit conditions exist.

A shortage of buildable lots and skilled labor and a lack of available capital for smaller builders are limiting the production of homes, thereby lowering inventory of homes, both new and existing. Moreover, rising labor, land and material costs is an increasing margin headwind. As housing starts accelerate, both labor and construction material costs continue to experience an upward pricing pressure.

Nevertheless, we expect Lennar’s profitability to continue to improve on the back of its solid backlog position, rising home prices, strong liquidity position and strategic land acquisitions. Moreover, Lennar’s ancillary platforms — Rialto, Multi-Family, FivePoint and Financial Services — are evolving and are expected to contribute meaningfully from 2015/2016.

Other Stocks to Consider

Lennar carries a Zacks Rank #2 (Buy). Other stocks in the building construction sector worth considering include Beazer Homes USA Inc. (BZH), D.R. Horton, Inc. (DHI) and Toll Brothers, Inc. (TOL). All the three stocks have the same Zacks Rank as Lennar.

Read the Full Research Report on LEN
Read the Full Research Report on TOL
Read the Full Research Report on DHI
Read the Full Research Report on BZH

Zacks Investment Research