Lennar Earnings Preview: Waiting For Better Valuation

| About: Lennar Corporation (LEN)

Lennar (NYSE:LEN), one of the premier homebuilders in the sector, reports its fiscal 2nd quarter, 2013 financial results before the bell on Tuesday, June 25, 2013.

Analyst consensus is expecting $0.33 in earnings per share (EPS) on $1.33 billion in revenue, for expected year-over-year growth of 43% and 57%.

The consensus EPS estimate has been stable since the last March '13 earnings report, while revenue estimates have drifted higher.

Last quarter, reported in late March, 2013, LEN reported monster numbers (again) with revenues up 37%, EPS +225%, and orders rising 34%. From an analyst note out of Williams Financial, dated March 21, Southeast Florida was particularly strong, with backlog and orders rising 246% and 123% respectively.

The issues:

We are currently long only small positions in LEN and Toll Brothers (NYSE:TOL) despite the good fundamentals news based on some issues we have around the sector, detailed in this article on dilution and valuation, which was then supported by other examples of dilution.

The valuation:

At $39 per share, LEN is trading at 23(x) the fiscal 2013 estimate (current consensus) of $1.67, and 16(x) the current consensus estimate of $2.37 in 2014.

The expected growth over the next two years is a healthy 34% and 42% for 2013 and 2014.

Homebuilders are thought to be fairly-valued at 1.5(x) tangible book value (TBV). LEN is currently trading at 2(x) TBV.

Rising mortgage rates:

The elephant in the room with the homebuilders is how well they react and how well sales and pricing can be sustained in the event of rising mortgage rates.

Nishu Sood, the homebuilder analyst from Deutsche Bank, and the analyst that we think does some of the best work on the sector, published a note on June 11th, entitled "Rising Rates more likely to affect prices than volumes this summer."

Here are a few points from Sood's note:

  • Order data has not shown any sign of falling off after the May '13 rate rise;
  • A 60 bp's mortgage rate increase cuts purchasing power by only 7%. A payment on a $200,000 mortgage increases from roughly $880 to $950;
  • Nishu brought up one very good and final point in the note: he mentioned that interest rates aren't the sticking issue in housing today. It is still qualifying for a mortgage.

We have cut back our homebuilder position significantly as of late May '13, as Toll Brothers despite a solid earnings report, opened higher on the day and then traded lower throughout the day.

Despite good housing news in terms of permits, starts and Case-Schiller data, the sector hasn't made any headway or outperformance since January '13, and in fact LEN is now flat on the year.

Just from talking to and reading pieces by real estate brokers around Chicago, the sudden demand to own housing again has absolutely exploded, and thus bidding wars on homes analogous to 2006 and 2007 seems to have reared its ugly head again.

This is not healthy home buying behavior. We learned that the hard way.

We want to own Lennar, just at lower prices. We would start getting interested in LEN down below $30, although the stock may never get there.

The homebuilders had a monster run in 2012: LEN was up 97% excluding the dividend.

We are transitioning portfolios to more cyclical and "global growth" oriented sectors and stocks.

We will continue to follow the sector and hope to own the stocks lower.

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.