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Lennar remains best-in-breed in mid-range new home construction.

Forward growth estimates are expecting robust revenue and EPS growth.

The technicals of Lennar and homebuilders look somewhat ominous.

Lennar, (NYSE:LEN), the best-in-breed homebuilder in the mid-range price of $200k to $400k is scheduled to report their fiscal q1 '14 financial results on Thursday, March 20, 2014 before the opening bell.

Per Thomson Reuters, analyst consensus is looking for $0.28 in earnings per share (EPS) on $1.821 billion in revenues for expected year-over-year growth of 8% and 29% respectively.

The first fiscal quarter of each year is usually the weakest for the homebuilders since the three months encompasses the holiday quarter and winter's prime months.

In q4 '13, LEN generated 42% in revenue growth, 127% in operating income growth, and 30% in EPS growth. Orders grew 14% y/y while ASPs grew 12% y/y.

There is little debate calendar 2013 was a very strong year, despite the sharp increase in the 10-year Treasury from 1.61% in early May 2013 to the 12/31/13 close of 3.03%.

Analyst sentiment has turned on the homebuilders of late as the sharp increase in rates in 2013 and the tough winter has seemed to take some of the steam off the sector.

To me, the fundamentals per our internal spreadsheet still look pretty decent:

Common size P/L 11/13 q48/13 q35/13 q22/13 q111/12 q48/12 q35/12 q22/12 q111/11 q48/11 q35/11 q22/11 q111/10 q4
* Lennar Homebuilding92%91%90%88%88%87%87%86%88%87%87%84%89%
* Lennar Financl Services5%7%8%10%9%10%10%9%8%8%8%10%9%
* Rialto Investments3%2%2%3%3%3%4%4%5%5%6%6%2%
Total revenues100%100%100%100%100%100%100%100%100%100%100%100%100%
* Lennar Homebuilding op eps15%13%11%7%8%6%6%3%3%3%3%6%3%
* Lennar Fincl Services op eps1%1%2%2%2%2%2%1%1%1%0%0%1%
* Rialto Investments op eps1%0%1%0%0%-1%1%1%1%1%3%4%3%
Total operating income17%14%14%9%11%8%9%5%4%6%6%11%7%
* Corp G&A2%2%2%3%3%3%3%4%3%3%3%4%3%
Earnings before taxes14%12%11%5%8%5%6%1%1%3%3%7%5%
* income taxes5%4%1%0%1%1%0%0%-1%0%0%0%0%
Net earnings attr to non-ctrl int10%8%10%6%9%6%5%1%3%3%3%7%5%
(net earnings attr to non-ctrl int)1%0%0%0%0%-1%0%-1%-1%0%1%2%1%
Net earnings9%8%10%6%9%8%5%2%3%3%2%5%4%
y/y growth
* Lennar Homebuilding47%53%59%39%43%34%22%34%10%-1%-6%-10%-11%
* Lennar Financl Services-18%6%34%41%68%61%49%18%-9%-4%-20%8%38%
* Rialto Investments64%-25%-23%-20%-23%-12%-21%-4%136%11%23%11070%#DIV/0!
Total revenues21%34%15%29%42%46%53%37%42%34%22%30%11%-1%-6%-3%-6%
* Lennar Homebuilding op eps178%184%184%236%320%163%163%-44%-7%-29%-28%551%-110%
* Lennar Fincl Services op eps-49%-7%62%95%267%216%621%597%-23%17%-82%-231%50%
* Rialto Investments op eps227%-112%14%-73%-21%-149%-67%-78%-76%-36%55%-2499%#DIV/0!
Total operating income 127%150%141%154%257%94%75%-44%-37%-26%-20%1560%-125%
* Corp G&A11%17%16%16%37%42%42%15%14%-5%-7%3%-26%
Earnings before taxes164%223%211%726%791%143%102%-82%-70%-39%-27%-291%-114%
* income taxes405%426%324%-339%-236%2107%383%-37%267%-4%-109%-121%-99%
Net earnings attr to non-ctrl int48%71%201%614%385%204%91%-79%-40%-39%-47%-226%20%
(net earnings attr to non-ctrl int)-2398%-90%212%-92%-83%-667%-116%-162%-146%-69%61%-1292%#DIV/0!
Net earnings32%39%200%284%311%320%232%-45%-5%-31%-65%-192%-10%
wtd avg shares outstanding1%3%4%6%14%13%12%10%1%1%5%7%6%
Fully diluted eps22%43%-15%8%30%35%190%225%250%264%200%-43%-6%-31%-67%250%-11%

To help the reader, through the numbers, if you look at the common size P/L, the homebuilder segment operating margin has appreciated nicely from 3% in early 2011, to 15% as of late 2013. Given the housing recovery, it likely still has more upside too.

Also, in the following tables, if we look at expected EPS and revenue growth for the next 3 years, LEN is looking at growth substantially better than the S&P 500:

Expected and Actual EPS growth:

eps growth - estimated and actual
2016 eps growth - estimated 30%22%
2015 eps growth - estimated 32%30%31%24%36%96%64%58%
2014 eps growth - estimated 15%22%32%40%37%43%39%44%
2013 eps growth - actual 72%60%54%34%34%47%57%67%
2012 eps growth - actual 160%160%160%160%160%129%81%71%
2011 eps growth - actual -6%-6%-6%-6%-6%-6%-6%-6%

Expected and Actual Revenue Growth:

yoy revenue growth
2016 rev growth - estimated 18%19%
2015 rev growth - estimated 20%19%22%27%29%9%30%34%
2014 rev growth - estimated 26%25%33%30%27%30%26%28%
2013 rev growth - actual 44%43%43%42%32%35%24%21%
2012 rev growth - actual 33%33%33%33%33%30%22%20%

* Source: internal spreadsheet and Thomson Reuters consensus estimate data.

The last column is expected growth for EPS and revenues as of the last earnings report in mid-December '13.

The trick with valuing homebuilders is that the key metrics or the important valuation metrics might be changing. In the 1990s and 2000s, "Price-to-tangible-book-value" (PTB) was the key metric for valuing a homebuilder: on that metric, homebuilders including LEN, look wildly overvalued, since 1.5(x) Price to TB for any homebuilder was thought to be fairly valued.

LEN, using the last quarter's balance sheet and current share price, is trading at 1.9(x) - 2(x) book value, with no goodwill explicitly disclosed on the balance sheet.

My point is though, that with the earnings growth disclosed above, based on current analyst consensus, and given the severity of the housing depression, there could be a growth component given to the homebuilders today, that isn't there previously.

The fact is, over the next 3 years, Street analysts are expecting LEN to average 26% EPS growth, and 21% revenue growth.

That is not too shabby, and probably assumes rates don't rise too much.

In terms of intrinsic value estimates, our internal model puts a $60 "intrinsic value" on LEN, and that is primarily an earnings based model. Morningstar, with their traditional, conservative, discounted cash-flow model, values LEN at $28. Taking an average of the two and you get to $44, which is what we like to do when there is a wide difference in the two model's valuations.

Finally, LEN just peaked at $44.40 in Feb '14, which is the EXACT price at which it peaked in May '13. The stock is already 10% lower after the Feb '14 peak.

Here is the chart, and it sure looks like LEN has put in a technical "double-top" from a chart reader's perspective:

(click to enlarge)

Given the technical set-up, unless the stock sees a breakout above $44.50 on Thursday, and on robust volume, we will continue to avoid the stock.

We still own LEN in one long-term account with a $20 cost basis on the stock, from early 2012.

Our two favorite stocks in the sector are LEN and TOL, and we own small positions of each.

Here is an article we wrote last May '13 on why we sold the majority of our homebuilder positions. It wasn't all interest-rate related. Here was the first article in May '13, and the 2nd here in early June '13, and then here was our LEN preview last summer.

LEN's dilution has stopped the last 4 quarters, as share count has actually stabilized around 225 million shares per quarter. However, since August 2010, LEN's fully diluted share count has jumped from 197 million to 225.67 million or roughly 17% in three years.

That is a lot of dilution.

This is something you don't see in any other sector of the S&P 500. Personally, I think it is because the homebuilders are so highly leveraged with generally poor credit ratings (mostly junk rated, except TOL), and the sector is so cyclical.

Given the contrasting fundamentals and technical, let's see if revenue and EPS growth is sustained post the Thursday release.

One of either the fundamental or technical cases has to give.

In a perfect world, we would love to own LEN under $30 and even under $25, but I'd think you need a prolonged period of increases in the 10-year Treasury, comparable or even worse than 2013.

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.