A month has gone by since the last earnings report for Lennar (LEN). Shares have added about 1.9% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Lennar due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Lennar's (LEN) Shares Up on Q3 Earnings and Revenue Beat
Lennar Corporation reported better-than-expected results in third-quarter fiscal 2019 (ended Aug 31, 2019). The results mainly benefited from a solid resurgence in demand for new homes, depicting a healthy economy and declining borrowing costs. The company reported quarterly earnings of $1.59 per share, surpassing the consensus mark of $1.32 by 20.5%. Also, the reported figure jumped 16.1% from $1.37 reported in the year-ago quarter. The upside was mainly driven by higher deliveries and continued operating leverage backed by technological efforts. Revenues of $5.86 billion topped the consensus estimate of $5.52 billion by 6%. The reported figure also increased 3% year over year. Moderate home prices and declining mortgage rates stimulated both affordability and demand, thereby enhancing its top line during the quarter.
Homebuilding: Revenues from the segment totaled $5.44 billion, up 2.9% from the prior-year period. The increase was backed by a higher number of homes delivered during the quarter. Within the Homebuilding umbrella, home sales contributed $5.33 billion to total revenues, up 2% from a year ago, and land sales accounted for $104.5 million, significantly up from the year-ago figure of $62 million. Other homebuilding revenues added approximately $4 million to total Homebuilding revenues. Home deliveries during the reported quarter increased 7% year over year to 13,522, buoyed by a higher number of homes delivered across all the regions served by the company. The average sales price of homes delivered was $394,000, reflecting a 5.1% year-over-year decline. The decline in selling price was owing to continued shift to lower-priced communities, higher sales incentives and an unfavorable product mix, as a larger percentage of deliveries came from the East segment. New orders grew 8.5% from the year-ago quarter to 13,369 homes. Potential value of net orders also increased 2.7% year over year to $5.2 billion. Backlog at the end of the fiscal third quarter decreased 2% from the comparable year-ago period to 18,908. Potential housing revenues from backlog also declined 9% year over year to $7.6 billion.
Gross margin on home sales was 20.4% in the quarter, up 10 basis points (bps). The upside was attributable to the absence of purchase accounting adjustments on CalAtlantic Group, Inc. homes that were delivered during the comparable period of last year. Selling, general and administrative or SG&A expenses, as a percentage of home sales, improved 20 bps to 8.3%. The improvement was due to better operating leverage, owing to increased home deliveries. Operating margin on home sales improved 30 bps to 12% in the quarter.
Financial Services: The segment’s revenues decreased 13.1% year over year to $224.5 million in the reported quarter. However, operating earnings came in at $78.8 million, up from $60.5 million a year ago. The upside was primarily backed by a strong mortgage business.
Lennar Multi-Family: Revenues of $184 million from the segment increased 82% from the prior-year quarter. However, the segment generated operating earnings of $10.5 million in the quarter against an operating loss of $3.9 million in the comparable year-ago period.
Lennar Other: The segment’s revenues totaled $9.6 million, down from $27.6 million a year ago. Operating earnings were $15.9 million during the quarter compared with $10.1 million in the comparable period of 2018.
Lennar had homebuilding cash and cash equivalents of $795.4 million as of Aug 31, 2019, down from $1.34 billion on Nov 30, 2018. Net homebuilding debt was $8.28 billion as of Aug 31, 2019 compared with $7.21 billion on Nov 30, 2018. Net debt to capital ratio at the end of the reported quarter was 35% compared with 33.1% at fiscal 2018-end. During the fiscal third quarter, the company repurchased 6.1 million shares of common stock for $295.9 million.
Fiscal 2019 Guidance
The company expects deliveries within 50,900-51,100 units (versus prior guidance of 50,500-51,000) and new orders in the range of 50,550-50,750 units. Average sales price or ASP is expected to be $400,000. Lennar expects gross margin in the range of 20.6% (versus 20.5-21% expected earlier). SG&A expenses for the year are estimated at 8.4% (versus previous projection of 8.3-8.4%). The company expects Financial Services to generate pre-tax profits within $218-$220 million.
New orders are expected between 12,200 and 12,400; deliveries within 15,800-16,000 homes; ASP between $385,000 and $390,000; gross margin in the range of 21.3-21.5% (versus 20.25-20.5% expected earlier); and SG&A in the band of 7.7-7.8% (versus prior expectation of 8.3-8.4%). The company expects earnings between $1.81 and $1.94 per share for the quarter. The company expects its multi-family segment will breakeven. Meanwhile, management anticipates pre-tax profits from the financial services operations will be in the range of $68-$78 million. Lennar expects 25.5% tax rate for the quarter. It expects corporate G&A in the range of 1.4% of total revenues. Lennar anticipates pre-tax earnings from the combined category of JV profits, land sales and other for the quarter to be in the range of $5-$10 million, bringing full year value to $26-$31 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
At this time, Lennar has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Lennar has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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