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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.

LEN Chart

LEN data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
  3. Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. 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
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. 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

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - FAIL
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $39.62
MG Value $59.52
MG Opinion Undervalued
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
PEmg 25.63
Current Ratio 11.88
PB Ratio 1.94

Balance Sheet - 11/30/2013

Current Assets $8,288,700,000
Current Liabilities $697,800,000
Total Debt $5,065,600,000
Total Assets $11,273,200,000
Intangible Assets $34,000,000
Total Liabilities $7,104,300,000
Outstanding Shares 204,410,000

Earnings Per Share

2013 $2.12
2012 $3.11
2011 $0.47
2010 $0.50
2009 -$2.26
2008 -$7.00
2007 -$12.31
2006 $3.69
2005 $8.17
2004 $5.70

Earnings Per Share - ModernGraham

2013 $1.55
2012 $0.49
2011 -$1.92
2010 -$3.23
2009 -$4.05
2008 -$3.41

Dividend History

LEN Dividend Chart

LEN Dividend data by YCharts

Conclusion:

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.

Source: ModernGraham Quarterly Valuation Of Lennar