Lennar Earnings Preview: Valuation Is Full, But Cycle Still Early

| About: Lennar Corporation (LEN)

Lennar (NYSE:LEN) reports their fiscal 1st quarter, 2013, before the opening bell on Wednesday, March 20th, with the conference call to follow shortly thereafter.

Analyst consensus is looking for $0.16 in earnings per share on $895 million in revenues for expected year-over-year (y/y) growth of 100% and 23%, respectively. No one questions the homebuilders' record run in calendar 2012: Lennar was up almost 100%, 97% to be exact, and year-to-date is up about 8.5% (small dividend excluded), most of which came in January '13.

The sentiment around housing and homebuilders is now almost the complete opposite of one year ago and very bullish, almost universally so.

The thing that most surprised me when I looked at EPS estimates for LEN was that analyst looked to be trimming numbers on the homebuilder:

Lennar EPS estimate trends
Fiscal-year est's 2/13 11/12 8/12 5/12 2/12
2015 (est) $2.71 $3.12 $4.55 $3.11 $3.11
2014 (est) $2.26 $2.29 $2.32 $1.90 $1.97
2013 (est) $1.61 $1.67 $1.62 $1.32 $1.32

* Estimate data courtesy of ThomsonReuters, with the 2/13 estimates obviously "pre-release";

Estimated y/y Growth Rates of LEN EPS estimates
Fiscal year end 2/13 11/12 8/12 5/12 2/12
2015 (est) 20% 36% 96% 64% 58%
2014 (est) 40% 37% 43% 39% 44%
2013 (est) 29% 34% 47% 57% 67%
2012 (actual) 160% 160% 129% 81% 71%
2011 (actual) -6% -6% -6% -6% -6%

Source: internal spreadsheet, using ThomsonReuters data

As the reader can quickly see, while expected 29% growth in fiscal 2013 (ends Nov '13) isn't too shabby, the growth rate keeps getting trimmed over the last 5 quarters. Unlike some of the other homebuilders LEN has the financial services unit and distressed property unit (Rialto), but the lion's share of operating earnings are from the homebuilder operations.

In fiscal Q4 '12, reported early Jan '13, LEN announced plans to enter the multi-family business, which isn't expected to show results until the middle part of the decade.

The key metric for us is that, according to long-term housing start data, the average housing starts per year since the early 1960s is roughly 1.25 million. As of the December, '12 and January '13 data, the run rate for housing starts is still roughly 850,000 - 900,000, which is still below the long-term run rate. Single family home starts are up about 20% year-over-year while multi-family starts are up 30%.

We remain long LEN and TOL in client accounts, but would expect the stocks to temper the robust 2012 returns. Our internal model puts a fair value on LEN at $44 per share, while Morningstar pulled their ratings on the stocks, after rating the shares fairly valued at $22.

The homebuilders are not easy businesses to analyze or value: supposedly "intrinsic value" for each homebuilder is the value of the undeveloped land that it owns, which isn't easily discerned from financial statements. The homebuilders are loaded with debt with only one investment grade credit rating in the group and that is TOL.

Plus, the cash-flow statement is irrelevant (which bothers us) and the shares outstanding grow every quarter, which means the homebuilders almost without exception are diluting their shareholders. At some point we may sell out of our homebuilder stocks and just get housing exposure via the banks and retailers.

Right now, though, the cycle is right, and pullbacks should be bought. But be careful, I'm guessing investors don't realize what they are buying when they buy the shares of the typical homebuilder.

Disclosure: I am long LEN, TOL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.