Lennar Earnings Preview: Sweet Spot Of The Housing Cycle, But Valuation Gives Us Pause

| About: Lennar Corporation (LEN)

Up over 340% from its early October 2011 low print of $12.14, Lennar (NYSE:LEN) reports \fiscal 4th quarter, 2012 earnings on Tuesday morning, Jan. 15th, before the market opens.

Per Thomson Reuters, the analyst consensus is expecting $0.43 in earnings per share, on $1.3 billion in revenues for expected year-over year growth of 168% and 38%, respectively.

Both the revenue and earnings per share estimates for fiscal Q4 '12 have moved steadily higher since the 3rd quarte4 2012 earnings report.

In the 3rd quarter, LEN reported blow-out numbers, with a 43% upside surprise in earnings per share, driven by a 5% upside surprise in revenues.

Q3 data summary:

* Deliveries grew 28% while "delivery ASP's" grew 4% (ASP is average selling price);

* Orders grew 44% while order ASP's grew 9% y/y;

* Revenues grew 34%, while earnings per share grew 264%;

* SG&A fell 230 bp's resulting in operating margin expansion (always a positive, regardless of the sector);

* Gross margin was 23%, a cycle high for the homebuilder;

The 60 year housing bull market which ended in 2005 - 2006 resulted in the first national decline in home prices since the Great Depression, crushing the homebuilders in the process. Housing demand, not to mention home credit, evaporated almost overnight, and the homebuilders, which have remarkably Frankensteinian balance sheets as it is, had to stress their balance sheets further. I'm amazed none of the large public homebuilders went belly up during this bear market.

Here are past and forward revenue estimates for LEN currently:

LEN revenue - actual and estimates 8/12 qtr end 5/12 qtr end
2015 est rev gro 9% 30%
2014 est rev gro 35% 26%
2013 est rev gro 35% 24%
2012 est rev gro 30% 22%
F/Y '15 (est) $7,661 $7,661
F/Y '14 (est) $7,403 $5,890
F/Y '13 (est) $5,416 $4,683
F/Y '12 (est, 1 qtr left) $4,015 $3,771
F/Y '11 $3,095 $3,095

Here is the same data around earnings estimates:

LEN eps - actual and est. 8/12 qtr 5/12 qtr 2/12 qtr
'15 eps gro (est) 96% 64% 58%
'14 eps gro (est) 43% 39% 44%
'13 eps gro 47% 57% 67%
'12 - eps gro (est - 1 qtr) 129% 81% 71%
'11 eps gro - actual -6% -6% -6%
F/Y '15 $4.55 $3.11 $.311
F/Y '14 $2.32 $1.90 $1.97
F/Y '13 $1.62 $1.37 $1.37
F/Y '12 $1.10 $0.87 $0.82
F/Y '11 $0.48 $0.48 $0.48
F/Y '10 $0.51 $0.51 $0.51
F/Y '09 ($2.45) ($2.45) ($2.45)

est - ThomsonReuters consensus estimate

For fiscal 2012 (F/Y '12), the quarter to be reported Tuesday, Jan 15, '13 is the 4th quarter.

How LEN's p.e ratio has tracked:

2015 - est 8(x) 8(x) 8(x)
2014 - est 15(x) 14(x) 13(x)
2013 - est 22(x) 19(x) 19(x)
2012 - est 73(x) 54(x) 54(x)

The reader can quickly discern that both revenue and earnings estimates have been revised upward for most of 2012, which has given the homebuilder stocks a 'momentum-like" trading quality the last few months.

Most 2013 "guru" forecasts like Byron Wein have been pounding the table on anything housing-related for calendar year 2013, which in our minds has only exacerbated the problem.


* The only valuation metric where the majority of homebuilders look reasonably-valued is the "p-e to growth" metric, as the above growth rates and p.e's imply. Expected forward growth over the next few years are still above the current multiples, and I'm guessing analysts are struggling with where ZIRP (zero interest rate policy) ends, and tightening begins in terms of monetary policy.

* Price-to-tangible book, and price to cash-flow, all look stratospheric for LEN and for the rest of the sector.

LEN's current p.e of 22(x) expected 2013 eps, is just half the expected growth rate of 47%, which is a good sign.

Some fundamental points to ponder:

* LEN hasn't generated a positive quarter of operating cash flow in some time. This fiscal year, in the best year of recovery in decades, LEN has generated negative cash-from ops of -$132 ml, -$81 ml, and -$277 ml for the last 3 quarters respectively. That may be something peculiar to a homebuilder's balance sheet and cash-flow statement, but with $1.3 billion in long-term debt and a need to service that debt, we still prefer to see publicly-traded company generating positive cash-from-operations.

* We model the financials of any company we follow, usually extensively, and the homebuilders like LEN have very low effective tax rates, thanks to the tax loss carry-forward from the 2006 - 2010 years. Some homebuilders like LEN and TOL have started to recognize this asset (LEN did this in fiscal q2'12 reporting earnings of $2.06 per share, when operating eps was just $0.08 - $0.10 per share) so analysts usually "normalize" earnings over a stretch of time with normal tax rates to get an idea of what the true earnings power of a homebuilder can be.

* Single-family housing starts peaked in 2005 - 2006 at 1.7 - 1.8 million, with the most recent S/F housing starts data showing an 861,000 annual run rate or still 50% below the previous peak. Even if we discount the housing bubble data by 25%, and assume maybe 1.2 million starts are "normal" in today's market, we are still just 2/3rds of the run rate for peak capacity.


1.) The housing sector fundamentals started improving over a year ago, and are still early in the recovery, although in 2013, housing and the homebuilders face tougher comparisons. The homebuilders stocks had phenomenal returns in 2012, which we don't think are repeatable in 2013.

2.) The valuation of homebuilders are nosebleed, which isn't uncommon for uber-cyclical sectors. Only the "p.e-to-growth" leaves the homebuilders looking desirable from an investment perspective, as the sector has moved from "deep value" (trading below tangible-book-value), to value to now growth investors.

3.) When we normalize earnings for LEN, we think the homebuilder can generate $2.00 to $2.50 a share, with a normal effective tax rate, versus the current estimate of $1.57 for fiscal 2013.

We have long positions in LEN and TOL (a bigger position in TOL), and are awaiting a pullback in the sector to re-load our weightings.

While TOL is the best balance sheet in the sector (the only investment grade rating and that by a hair, with a BBB-rating), LEN is one of the better operators, through many cycles.

We are waiting for a pullback to the mid to low $30s to take a bigger position in the stock.

Disclosure: I am long LEN, TOL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Residential Construction, , Earnings
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