Why You Should Add Lennar (LEN) to Your Portfolio Right Now
Shares of Lennar Corporation LEN have gained 22.7% in the last three months, outperforming the 17.6% growth of its industry. Additionally, this leading homebuilder outperformed the industry in each of the four-week, 12-week and 52-week time frames. The overall outlook for the homebuilding industry remains positive, with healthy economy, strong job market and historically low mortgage rates, and the companies are cashing in on this positive momentum.
Again, investing in the industry might sound profitable right now, as it falls within the top 7% (17 out of 256 industries) of the Zacks Industry Rank, which hints at further growth.
The Zacks Consensus Estimate for earnings for both fiscal 2018 and 2019 have increased 9.1% and 14.9%, respectively, in the last 30 days for Lennar, thus further reflecting optimism in the stock’s prospects and substantiating its Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
What Makes Lennar a Solid Bet
Stellar Performance & Upbeat Outlook: After a strong performance in 2014, 2015, and 2016, Lennar once again delivered outstanding operating results in fiscal 2017. Thanks to strong demand, Lennar’s total revenues grew 15% year over year in fiscal 2017 on the back of a solid 15% rise in homebuilding revenues. This was primarily driven by a 11% increase in the number of home deliveries and a 4.1% rise in the average sales price of the homes delivered.
The company was successful in meeting its target of achieving the lowest SG&A percentage in its history in 2016 and repeated it in fiscal 2017. As a percentage of revenues from home sales, SG&A expenses contracted to 9.2% in the fiscal 2017, from 9.4% in the year-ago period due to improved operating leverage as a result of an increase in home deliveries.
The company maintained its 7% to 10% growth target and is focused on cutting down operating costs, in order to drive bottom line and cash flow. In its recently released fourth quarter of fiscal 2017 results, Lennar witnessed robust market improvement, which was supported by 11% year-over-year increase in its new home orders (up 18% in dollars).
The company remains positive about the overall homebuilding market in 2018 too, banking on solid demand for homes, favorable job market, and solid economy, along with the added tailwinds of recent tax law changes that are expected to continue propelling the housing market forward.
Impressive Expected Earnings & Revenue Growth: Possibly, nothing is more important than earnings growth.
On this front, Lennar has put up a historical (three-five year) EPS growth rate of 24.1%, in line with the industry average.
The company’s fiscal 2018 earnings are expected to grow 38.6%, while the Zacks Homebuilding Industry’s earnings are likely to increase 26.8%. Lennar’s revenues are expected to increase 12.6% in the current year compared with the industry average growth of 10.1%, thereby making it a great pick in terms of Growth investment. The stock has a Growth Score of B.
The company’s EPS growth is expected to increase 13.8% the next year on 8.5% growth in revenues.
CalAtlantic Acquisition: In Oct 2017, Lennar agreed to take over CalAtlantic Group Inc. CAA in a $9.3 billion deal (including debt), which will give birth to one of the country’s top three home builders in 24 of the top 30 U.S. markets. CalAtlantic investors would own approximately 26% of the combined entity upon the deal's expected closing in February 2018.
Miami, FL-based Lennar has a large footprint in California, Arizona, Florida, Tennessee, Virginia, Washington, Nevada and elsewhere. CalAtlantic has presence in Illinois, Indiana, Delaware, Florida, South Carolina, North Carolina and other states.
By combining, Lennar and CalAtlantic Group will control nearly 240,000 homesites nationwide, thereby enhancing their scales in the markets. The combined company will have a footprint touching approximately 50% of the U.S. population and the combined entity is expected to generate meaningful cost savings.
The deal is expected to generate roughly $250 million in annual cost savings, with about $75 million in savings expected in fiscal 2018. The savings include lower overhead costs and elimination of duplicative corporate expenses.
Solid VGM Score and ROE: The company has an impressive VGM Score of B. Our VGM Score identifies stocks that have the most attractive value, growth, and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 or 2 make solid investment choices.
Lennar’s trailing 12-month return on equity (ROE) supports its growth potential. ROE in the trailing 12 months is 12.2%, while the industry gained 10.8%, reflecting the company’s efficient usage of shareholders’ funds.
Other Stocks to Consider
Investors may also consider stocks like D.R. Horton, Inc. DHI and KB Home KBH, each sporting a Zacks Rank #1.
D.R. Horton is likely to witness an increase of 27.1% in earnings for the current fiscal year.
KB Home is expected to witness 34.1% growth in earnings this year.
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