Lennar Corporation (NYSE:LEN) has consistently beat recent earnings estimates, which will immediately intrigue many potential investors. However, Benjamin Graham, the father of value investing, taught that investors must take emotion out of the equation, as the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment's merits. Here is a look at how the company fares in the ModernGraham valuation model.
The model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.
In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved 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.
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
|Value Based on 3% Growth||$32.29|
|Value Based on 0% Growth||$18.93|
|Market Implied Growth Rate||5.75%|
|Net Current Asset Value (NCAV)||$6.45|
Balance Sheet - November 2014
Earnings Per Share
Earnings Per Share - ModernGraham
LEN Dividend data by YChartsConclusion:
Lennar Corporation is suitable for Enterprising Investors but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years, while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.
When it comes to that valuation, it is critical to consider the company's earnings history. In this case, the company has grown its EPSmg (normalized earnings) from a loss of $3.28 in 2010 to a gain of $2.23 for 2014. This is a strong level of demonstrated growth which is well above the market's implied estimate of 5.75% annual earnings growth over the next 7-10 years. Here, the historical growth in EPSmg over the last five years is around 34% per year, which is clearly unsustainable over the long term. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.
Be sure to check out previous ModernGraham valuations of Lennar Corporation for greater perspective!
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