It has been about a month since the last earnings report for Lennar (LEN). Shares have added about 9.4% in that time frame, outperforming 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 catalysts.
Lennar (LEN) Q3 Earnings & Revenue Beat Estimates
Lennar Corporation reported better-than-expected results for third-quarter fiscal 2020 (ended Aug 31, 2020). The quarterly results benefited from robust housing market fundamentals backed by low interest rates, and persistent undersupply of new as well as existing inventory. Also, solid execution of homebuilding and financial services businesses added to its bliss.
The company reported quarterly earnings of $2.12 per share, handily surpassing the Zacks Consensus Estimate of $1.51 by 40.4%. Also, the reported figure jumped 33.3% from $1.59 per share in the year-ago quarter. This marked the sixth consecutive quarter of an earnings beat. The results mainly benefited from effective cost control and focus on making its homebuilding platform more efficient, which in turn resulted in higher operating leverage.
Revenues of $5.87 billion topped the consensus mark by 10.1%. The reported figure also increased 0.2% year over year.
Homebuilding: Revenues at the segment totaled $5.51 billion, up 1.2% from the prior-year quarter. Within the Homebuilding umbrella, home sales contributed $5.47 billion to total revenues, up 2.6% from a year ago. However, land sales accounted for $34.3 million, down 67.1% from the prior-year quarter. Higher home sales were due to increased new home deliveries and average sales price or ASP of homes delivered.
Home deliveries for the reported quarter grew 2.2% from the year-ago level to 13,809 units. The average sales price of homes delivered was $396,000, reflecting a 0.5% year-over-year increase.
New orders grew 16% from the year-ago quarter to 15,564 homes. Potential value of net orders also increased 20% year over year to $6.3 billion.
Backlog at fiscal third quarter-end inched up 4% from a year ago to 19,697. Potential housing revenues from backlog also advanced 4% year over year to $7.9 billion.
Gross margin on home sales was 23.1% for the quarter, up 270 basis points (bps). The upside can be attributed to its efforts toward reducing construction costs.
Selling, general and administrative or SG&A expenses — as a percentage of home sales — improved 30 bps to 8% on improved operating leverage.
Operating margin on home sales also improved 310 bps year over year to 15.1% for the quarter.
Financial Services: The segment’s revenues increased 5.6% year over year to $237.1 million for the reported quarter. Operating earnings came in at $135.1 million, up 80.9% from $74.7 million a year ago on strong mortgage business owing to higher volumes and margins.
Lennar Multi-Family: Revenues of $115.2 million at the segment decreased 37.4% from the prior-year quarter. Also, the segment incurred operating loss of $5.1 million for the quarter against operating earnings of $10.2 million a year ago.
Lennar Other: The segment’s revenues totaled $12.9 million, up 34.3% from $9.6 million a year ago. Operating income was $8 million for the quarter, down from $15.8 million in the comparable period of 2019.
Lennar had homebuilding cash and cash equivalents of $1.97 billion as of Aug 31, 2020, up from $1.2 billion on Nov 30, 2019. Total homebuilding debt was $7.2 billion as of Aug 31, 2020 compared with $7.8 billion on Nov 30, 2019. Total homebuilding debt to capital at fiscal third quarter-end was 29.5% compared with 32.8% at fiscal 2019-end.
Notably, the company has no outstanding borrowings under the $2.4-billion revolving credit facility, thereby providing $4.4 billion of available capacity.
For the fiscal fourth quarter, Lennar expects deliveries in the range of 15,500-16,000 homes (versus 14,300-14,600 homes expected earlier); ASP within $390,000 (versus $380,000 anticipated earlier); homebuilding gross margin in the 23.25-23.5% band (versus 21.75-22% expected earlier); and homebuilding SG&A of 7.7-7.8% (versus 8% projected earlier). New orders are expected within 13,800-14,300 (versus 12,000-12,250 of earlier projection).
Although the company lifted its projection for the fiscal fourth quarter, the metrics are still down year over year (baring homebuilding gross margin and new orders). For fourth-quarter fiscal 2019, its deliveries were 16,420 units, ASP was $393,000, homebuilding gross margin was 21.5%, homebuilding SG&A was 7.6% and new orders were 13,089 homes.
Owing to continued shift to lower-priced communities and regional product mix due to stay-at-home orders in certain higher-priced markets, the company has been lowering ASP of homes delivered over the last few quarters.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 21.78% due to these changes.
At this time, Lennar has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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 trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Lennar has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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