Lennar Corporation: Shares Recover Quicker Than The Housing Market

| About: Lennar Corporation (LEN)

Shares of homebuilder and financial service provider Lennar Corporation (LEN) closed the week up 5% after the company released a strong set of first quarter results.

First quarter results
For the first quarter of 2012 net profits came in at $15 million compared to $27 million last year. Earnings per share fell from $0.14 to $0.08 in its current period. A one-time legal settlement boosted net income last year.
Revenues rose 30% to $725 million, mostly driven by an increase in the homebuilding division. Revenues came in ahead of analyst expectations who estimated $698 million in revenue.

Over the last quarter the company delivered 2,482 houses for a total value of $614 million. It received 3,022 orders for new houses for a total value of $763 million, up 36% on the year. Consequently the backlog, an important gauge for future revenue, increased to $711 million.

Revenues rose 34% to $625 million. Operating income fell to $20 million, down from $35 million as last year's results where impacted by a $29 million legal settlement. The company noticed some strength in the housing market as it was able to lower sales incentives while increasing revenue at the same time.

Financial Services
Financial service revenue rose 18% to $68 million. Operating income rose from a mere $1 million to over $8 million this quarter as a result of improved operating performance and a reduction in costs.

Rialto Investments
Investment revenue fell 4% to $32 million. Operating profit came in at $5 million compared to $23 million last year. The results of the division are largely impacted by the direction of home prices and a recovery in prices during 2012 could boost the bottom line for the investment division.

The first quarter was relatively strong for the third largest US homebuilder as orders jumped by 36% on the year. A stabilized housing market, low home prices and interest rates let to an increase in orders and consequently revenues.

"Our first quarter results reflect another quarter of confirmation that both the housing market and the overall economy are stabilizing and that a very real trend is beginning to take shape," according to CEO Stuart Miller.
Although the company did not issue an explicit outlook statement, it expects to be profitable for a third year in a row.

Lennar ended the quarter with $800 million in cash and equivalents, its net debt position came in at $2.7 billion.
With a valuation of roughly $5 billion, the company is valued at 1.7 times annual revenues and 54 times 2011's earnings.

Given the strong first quarter and increasing backlog, the company is likely to show an increase in revenue and profitability for the whole of 2012. Furthermore the "relative strong balance sheet and sufficient liquidity will help the company to capitalize on opportunities" according to Miller.

Investment thesis
The good earnings report of Lennar diminishes fears that the recovery of the home-building sector might be unraveling, after US home prices fell for a fifth month in a row in January. Other big homebuilders such as PulteGroup (PHM) and D.R. Horton (DHI) also rose on the day Lennar reported its numbers.

Home builders are notoriously reliant on economic circumstances and the general economy as a whole. The housing bubble has left deep scars in the housing market and despite a modest recovery the market is far removed from its highs.

Shares of Lennar trade at their high end of the $5-$15 trading range of the last 5 years and it takes a significant recovery in the housing market before shares can move considerably higher. Given the dismal state of the housing market, although there are some positive signs, shares of Lennar have recovered much quicker than the housing market.

I am not a buyer of Lennar at this moment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.