Lennar's 2nd quarter 2014 earnings: Rising margins and prices (Part 2 of 4)
Lennar’s top line is growing rapidly
For the second quarter, Lennar reported $1.64 billion in revenues. This is an increase of 29% year-over-year. Homebuilding revenues increased 28%, to $1.6 billion from $1.3 billion in the second quarter of 2013. Like most builders, Lennar benefits from tight inventory. This allows Lennar to raise prices. This also explains some of the record margins Lennar has been reporting. Rialto reported $54.4 million in revenues. These revenues consisted mainly of securitization revenue and interest income from new loan origination.
Pay attention to both units and dollar values
For the quarter, average selling prices increased 13.7%, to $323,000 from $284,000 during the same period last year. We’ve seen increases in average selling prices from every homebuilder. Deliveries were 4,987 homes. This is an 11.7% increase from the second quarter last year. This is an improvement over some of the other builders, like KB Home (KBH), which actually experienced a drop in deliveries on a unit basis.
New orders increased 8% in units to 6,183 homes. The dollar value of new orders increased 20% to $2 billion. Backlog is 6,858 homes or $2.4 billion. This is an increase of 11% in units and 26% in dollar terms. Backlog is one of the best ways to forecast revenues going forward.
Lack of inventory remains an issue, but for how long?
The big question for builders is whether they can continue to raise prices as aggressively. Buyers are subjected to a double whammy between higher mortgage rates and higher prices. The big increase we’ve seen in average sales prices is probably not sustainable.
Another big question for builders is when the first-time homebuyer will return. Household formation was exceptionally low during the housing bust due to the tight job market. Housing starts are still highly depressed compared to historical levels. We recently broke 1 million starts, which has only happened twice since the collapse. Historically, a million units is a severely depressed level. We’ve averaged around 1.5 million units per year since the 1950s. At some point, builders will be unable to increase the top line simply by raising prices and will have to increase deliveries. This will help bring supply and demand back into balance. This will be positive not only for Lennar, but also for builders like PulteGroup (PHM), D.R. Horton (DHI), and Toll Brothers (TOL). Investors who are interested in trading the sector as a whole should look at the S&P SPDR Homebuilder ETF (XHB).
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