On Wednesday, homebuilder Lennar (LEN) reported decent fourth-quarter results that showed strength in new orders and solid advancement in backlog. Though we remain unexcited about the homebuilding group in general, Lennar’s results today suggest that we may finally be past the bottom in housing (both with respect to unit growth and pricing). Our fair value estimate for Lennar is unchanged.
The homebuilder’s revenue jumped 11% thanks to a 9% growth in deliveries (3,375 homes) and a 2% increase in the average sales price of homes delivered. Lennar experienced new order growth of 20% (3,027 homes), and while this number fell below deliveries—indicating a book-to-bill below 1—we were encouraged at the pace of growth. The homebuilider’s backlog advanced an impressive 35%, to 2,171 homes, and its cancellation rate came in at 20% for the period. The pace of growth is meaningful as Lennar is one of the largest builders, after Pulte (PHM) and DR Horton (DHI).
Lennar’s margins on home sales, excluding valuation adjustments, also showed improvement on a year-over-year basis, with gross margins jumping 80 basis points and operating margins improving 110 basis points. However, Lennar Financial Services and Rialto Investments—its asset management arm that focuses on distressed real estate assets—showed weaker results from the same period a year ago due to lower volume in its mortgage operations and lower earnings from non-controlling interests, respectively. Overall, net earnings came in at $30.2 million ($0.16 per share) compared to $32 million ($0.17 per share) in last year’s quarter and consensus estimates of $0.17 per share.
Looking ahead, we are growing more optimistic on US housing as the market appears to be at the end of stabilization and is starting to lay the groundwork for a firm recovery. US housing starts reached their highest levels in 19 months in November thanks to demand for rental apartments, though the performance remains well off levels achieved in the boom years. The combination of record-low interest rates and comparatively low home prices seems to finally be getting buyers to move forward with new purchases (modest improvements in the national employment situation is also helping).
That said, we continue to be cautious on the group and prefer derivative (bank ETFs KBE and XLF) and diversified plays (homebuilder ETF XHB) on the recovering housing market than direct exposure to any one particular homebuilder. We would considering adding the XHB in the market-beating portfolio of our Best Ideas Newsletter if positive housing trends continue.
Additional disclosure: We hold KBE and XLF in the portfolio of our Best Ideas Newsletter.