ModernGraham Quarterly Valuation Of Lennar Corporation
Summary
- LEN is suitable for Enterprising Investors, but not Defensive Investors following the ModernGraham approach.
- According to the ModernGraham valuation model, the company is undervalued at the present time.
- The market is implying 5.75% in annual earnings growth over the next 7-10 years, which is significantly less than the growth the company has seen in recent years.
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
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - FAIL
- Moderate PEmg (price over normalized earnings) ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
Key Data:
| Recent Price | $44.52 |
| MG Value | $85.73 |
| MG Opinion | Undervalued |
| 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 |
| PEmg | 19.99 |
| Current Ratio | 5.23 |
| PB Ratio | 2.11 |
Balance Sheet - November 2014
| Current Assets | $9,608,000,000 |
| Current Liabilities | $1,837,000,000 |
| Total Debt | $4,690,000,000 |
| Total Assets | $12,958,000,000 |
| Intangible Assets | $39,000,000 |
| Total Liabilities | $8,131,000,000 |
| Outstanding Shares | 229,100,000 |
Earnings Per Share
| 2014 | $2.80 |
| 2013 | $2.15 |
| 2012 | $3.11 |
| 2011 | $0.48 |
| 2010 | $0.51 |
| 2009 | -$2.45 |
| 2008 | -$7.00 |
| 2007 | -$12.31 |
| 2006 | $3.69 |
| 2005 | $8.23 |
| 2004 | $5.70 |
Earnings Per Share - ModernGraham
| 2014 | $2.23 |
| 2013 | $1.55 |
| 2012 | $0.47 |
| 2011 | -$1.95 |
| 2010 | -$3.28 |
| 2009 | -$4.10 |
Dividend History
LEN Dividend data by YCharts
Conclusion: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!
This article was written by
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.