Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Lennar Corp. (NYSE:LEN) fares in the ModernGraham valuation model.
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
- Moderate PEmg ratio - PEmg is less than 20 - FAIL
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
- Earnings Stability - positive earnings per share for at least 5 years - FAIL
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
|Value Based on 3% Growth||$22.42|
|Value Based on 0% Growth||$13.14|
|Market Implied Growth Rate||8.56%|
|Net Current Asset Value (NCAV)||$5.79|
Balance Sheet - 11/30/2013
Earnings Per Share
Earnings Per Share - ModernGraham
Lennar is an interesting company for the Enterprising Investor, but is not suitable for the Defensive Investor. The company has shown insufficient earnings stability or growth over the 10-year historical period and trades at a high PEmg ratio for the Defensive Investor. The company does pass all of the Enterprising Investor's requirements except the earnings stability requirement. As a result, Enterprising Investors should feel comfortable proceeding with further research into the company as well as other opportunities through a review of ModernGraham's valaution of D.R. Horton Inc. and 5 Undervalued Companies for the Enterprising Investor. From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from -$4.05 in 2009 to $1.55 for 2013. This level of demonstrated growth outpaces the market's implied estimate of 8.56% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.
Disclaimer: The author did not hold a position in Lennar or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.