Lennar's Earnings: Perception Is King

We know the homebuilders earnings in the US will stink, but we own Lennar (LEN) since the market is driving up homebuilder stocks on the ill conceived notion of a "rebound in 6 months". I continue to believe this market is simply understating the ills of a once in a lifetime bubble - just like technology stocks tooks years to bottom, and most never really came back, the real estate bubble simply was epic. But people keep clinging to hope and perception is reality - facts don't matter to this market, only thesis.

In the story that follows, more important than any numbers - read the CEOs comments and keep in mind this sector has been one of the best performing of late. Bulls will continue to pound into our head "you have to look through the bad news and look forward" - just like they were saying in financials last fall. We are looking at a L shaped recovery, not a V shaped, which is what the housing related stocks are yelling at us... and we're not even done going down in the L...

• Lennar Corp., one of the nation's largest homebuilders, said Tuesday its third-quarter loss narrowed as it cut costs, but revenue fell by more than half amid a prolonged housing slump. The Miami-based company's loss for the quarter ended Aug. 31 was $89 million, or 56 cents per share, compared with a loss of $513.9 million, or $3.25 per share a year ago. (Call Transcript)

• Deliveries of homes fell 49 percent in the quarter and the average sale price of homes fell 9 percent. Lennar has homebuilding operations in 14 states, including California and Florida, the hardest-hit housing markets in the nation.

• "While we expected the housing market to remain constrained throughout the third quarter, the weakness in the market actually accelerated as a result of increased foreclosures, weakened consumer confidence and tightened mortgage lending standards," Chief Executive Stuart Miller said in a statement. (translation - we live, breathe, die this industry and it is even worse than we predicted - but hedge fund computers apparently know better than us and are buying the stocks hand over fist - they live in a perception is reality world; unfortunately as a CEO I must live in the real world).

• Miller said that the landmark housing stimulus bill enacted in July, which included a temporary, $7,500 tax credit for first-time homebuyers, has failed to stabilize the skid in U.S. home prices. (Shocker - so free markets actually would work if we allowed it? You cannot subsidize reality away?) He said more government intervention is needed. (They're trying - because the first 18 steps didn't work - it's always the 19th step that solves the problem - people just don't understand that until prices fall to a place that vast majority of people can afford, there will be no bottom - no matter how much of our tax payer money we waste throwing at the problem - it is a big waste.)

• The business is also is facing mounting competition from deeply discounted, foreclosed properties and other preowned homes on the market. (This is a very key point which homebuilder bulls seem to completely dismiss). To cope, Lennar has cut prices and is "aggressively" reducing construction costs, cutting jobs and consolidating divisions in an effort to improve results.

• The builder ended the third quarter with $857 million in cash -- an increasingly important indicator as the slide in home sales continues -- and no outstanding borrowings under its credit facility. (In a 'cash is king' world, this is very important).

• The cancellation rate from buyers backing out on home contracts was 27 percent, improving from 32 percent in the same quarter last year. (In an ocean of bad news, bulls will of course cling to this 1 item of "improvement" and say, "look I told you the turn is here soon - clearly this is a sign - ignore everything else in the report and focus on this only").

• Lennar's backlog, or homes under contract yet to be delivered, fell during the quarter. As of Aug. 31, the figure stood at 3,554, compared with 6,367 units at the close of the same quarter last year.

Frankly this report is frightening. Aside from the cash position and the rate of cancellation falling a tad year over year - every other metric is pathetic. But the market loves the sector now (just like it loved financials about 7 weeks ago) and this has been a decent trading stock on days the Kool Aid is highest on the Street, so its been acting as a hedge for us.

There will be no "housing recovery in 6 months". Or 9 months. Or 12 months. Or 15 months. But reality does not matter. Perception is king. Money flow is all that matters in a market detached from fundamentals.

Disclosure: Long Lennar in fund; no personal position.

Comments

[notsosmart:]

all the ceo's have to make it look as good as possible.i dont believe anyone of them anymore about anything.think for yourself.

2008 Sep 24 09:06 AM

[plumber:]

The sooner Lennar goes bankrupt the better for all Americans. They continue to burn the cash generated during the bubble. They continue to buy back their own stock in a desperate attempt to stabilize the price. The only question that remains is, "how long will the cash hold out before Lennar realizes their aren't enought life boats on the Titanic?" Unfortunately, they will leave behind a blight of cheap, ugly, cookie cutter 3-2 ranch homes in weed-choked derelict tracts they tired so hard to sell as "communities". Stuart Miller should be placed under house arrest in one of the future slums that he has created.

2008 Oct 01 09:34 AM

[Help:]

Well, they are going bankrupt because they are a bunch of Liars. I was going to buy a condo for a price that is unreal. They want to sell condo conversions for double the price. I checked with a realstate, and he told me that the condo that I was going to buy for $300,000 is worth only $150,000 in the Miami area. My friend too, eventhough he lost his $5,000 deposit preferred not to buy.

2008 Oct 22 11:18 AM

[Help:]

Dont buy from Lennar ever again!!!!

2008 Oct 22 11:19 AM