Lennar, (LEN) the national mid-price homebuilder reports their fiscal 4th quarter, 2013 earnings before the bell on Wednesday, December 18th, with analyst consensus expecting $0.62 in earnings per share on $1.88 billion in revenue, for expected year-over-year (y/y) growth of 11% and 39% respectively.
If consensus is met, LEN will have finished fiscal '13 with 43% revenue growth and 60% EPS growth, truly remarkable numbers for the homebuilder.
Current fiscal 2014 consensus is expecting $2.43 in EPS on $7.3 billion in total revenues for current expected 2014 growth of 22% and 25% respectively.
The fact is the analysts are starting to incorporate slower growth into their forward forecasts, some of which is due to higher interest rates, and some simply due to "normalizing" rates of growth, even for a depressed sector.
Last quarter, LEN grew revenues 46%, EPS 35% on 14% order growth. The big surprise in q3 13 was the jump in gross margin which was 24.9%, versus the 24.5% - 24% expected in q3 13 and is nearing the perceived peak gross margin of 26% - 27% which LEN management thinks can be reached in the next few years.
We have still not re-entered the homebuilders, and are waiting for the inevitable taper and want to see how the stocks react.
It was last quarter, the 3rd quarter of 2013, where LEN finally put up a normal effective tax rate of 30%, which we felt was another reason earnings for the sector were overstated, as we detailed here in a September '13 article on LEN.
The valuation of LEN remains the key concern today, as the 1.5(x) tangible book valuation, which is the way homebuilders are normally valued, means LEN sports a price target by most of the brokers, in the mid $20's.
We use an earnings-based model that values LEN today at over $50, but after we adjust for items such as dilution, and the effective tax rate, those earnings could be overstated, thus with the prospect of higher rates, we wait to see if LEN can eventually drop into the mid to high $20's for a longer-term buy.
There is no question this is a quality homebuilder, with the accounting, loss carry-forward, and the tax issues being prevalent through the sector, and not just at LEN.
We are prepared to with through next Spring '14 to see what the Fed and Janet Yellen do and also watch the degree of slowing we see in LEN's forward estimates, as the jump in the 10-yaer Treasury yield from 1.4% as of July '12 to today's 2.88% 10-year yield, slowly gets absorbed.
I actually think faster and more robust job growth, would offset the increases in mortgage rates, but the US homebuyer would need to perceive it as permanent, and not the herky-jerky recovery we've seen off the 2009 market low.
Here is a good article we found on SeekingAlpha which explains some of the downward revisions to forward revenue estimates we've seen in LEN since the Sept '13 earnings report.
LEN's Recent Deliveries, ASP and Order History
|q4 '13 (est)||5655||27%||$310k||19%||4.5||15%|
* Source: StrerneAgee brokerage report dated 9/24
Toll Brothers (TOL) last week noted that the current quarter's orders growth was flat y/y, with some of that due to Sandy induced swings in the order pattern and business disruption.
We consider LEN and TOL to be the premier large-cap homebuilders in the sector, with a slight edge to TOL given the balance sheet and the investment grade credit rating.
We are giving the stocks and sector more time. However technically the stock have been bouncing around the low $30's since last June, and could be forming a longer-term bottom.
The demographics favor the sector. Housing formation requires that more homes be built, but the U.S. consumer is still digging out of the 2008 hole, either financially or emotionally.
We'll know what we want to do with the stocks once the 10-year yield trades above 3% and once we have a real taper announcement from the Fed.