Lennar (LEN) Down 1.5% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Lennar (LEN). Shares have lost about 1.5% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Lennar due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Lennar’s Q3 Earnings Beat Estimates, Revenues In Line

Lennar Corporation’s third-quarter fiscal 2018 adjusted earnings of $1.40 per share topped the Zacks Consensus Estimate of $1.19 by 21 cents. The reported figure mainly excludes acquisition and integration costs related to CalAtlantic Group, Inc.

Including these items as well as backlog/construction in progress write-up related to purchase accounting, the reported figure came in at $1.37 per share in the quarter, increasing considerably from the year-ago profit level of $1.04 per share.

The improvement was primarily attributable to greater demand, courtesy of strong housing market fundamentals, given low unemployment, higher wages and lower inventory levels.

Total revenues of $5.67 billion were on par with the consensus mark but increased 74% year over year as the Homebuilding and Financial Services performed significantly well.

Segment Details

Homebuilding: The segment’s revenues increased 83% from the prior-year quarter to $5.28 billion, driven by higher number of homes delivered and greater average selling prices. Within the Homebuilding umbrella, home sales constituted $5.22 billion (up 83.2% year over year) and land sales amounted to $62 million (up from $37.5 million a year ago).

New home orders increased 62% from the year-ago quarter to 12,319. Potential value of net orders increased 73% year over year to $5.1 billion.

Home deliveries increased 66% from the prior-year quarter to 12,613, buoyed by higher number of homes delivered across all homebuilding segments, courtesy of a significant increase in volume resulting from the CalAtlantic acquisition.

The average sales price (ASP) of homes delivered was $415,000, reflecting an increase of 10% year over year.

In the quarter under review, backlog grew 88% from the year-ago quarter to 19,220 homes. Potential housing revenues from backlog increased 105% year over year to $8.4 billion.

Margins

Gross margin on home sales was 20.3% in the quarter compared with 22.8% a year ago. Excluding the above-mentioned backlog/construction in progress write-up, gross margin on home sales was 21.9%. The decline was due to higher construction and land costs that were partially offset by an increase in the average sales price of homes delivered.

As a percentage of home sales, SG&A (selling, general and administrative) expenses improved 60 bps to 8.6% from 9.2% a year ago. The improvement was due to improved operating leverage, owing to higher home deliveries. Benefits from technology initiatives also added to the positives.

Financial Services: Financial Services revenues increased 9.9% to $236.3 million in the quarter. Operating earnings at the segment were $56.6 million, up from $49.1 million a year ago.

Rialto Investments: Rialto Investments’ revenues of $49.5 million decreased from $57.8 million a year ago. The segment reported operating earnings of $9.4 million in the quarter against a loss of $3.2 million in the year-ago quarter.

Lennar Multi-Family: Lennar Multi-Family revenues of $101.1 million decreased from $103.4 million recorded in the prior-year quarter. The segment incurred operating loss of $3.9 million in the quarter versus earnings of $9.1 million a year ago.

Financials

Lennar Homebuilding’s cash and cash equivalents totaled $833.3 million as of Aug 31, 2018, down from $2.3 billion on Nov 30, 2017. Net homebuilding debt of the company was $8.6 billion as of Aug 31, 2018 compared with $4.1 billion on Nov 30, 2017.

Rialto Transaction

Lennar remains on track for restructuring and marketing the Rialto platform to gain from potential disposition. Commercial real estate investment, investment management, and finance company Rialto’s balance sheet assets have been appropriately segregated to isolate the core asset management business, as Lennar’s management had earlier hired investment bankers to begin a process that could maximize the value of that franchise.

Q4 Guidance

Lennar has adjusted both deliveries and new order guidance, in order to primarily reflect the impact of Hurricane Florence and also the sluggishness that it has been currently experiencing in the market.

The company expects deliveries to be about 14,500 (versus prior expectation of 15,000 units) and new orders at 11,400 (as against 11,600). The company expects community count to be approximately 1,330. Average sales price is expected to be about 420,000 (versus $415,000 expected earlier).

Lennar has maintained its fourth-quarter gross margin guidance of 22.5-22.75%, excluding the write-up of backlog and construction in progress, and still expects to record about $50 million in the fourth quarter, related to return on write-up of backlog and construction in progress.

SG&A expenses for the quarter are estimated within 8-8.1%.

The company expects its Financial Services to generate earnings of about $57 million (versus $63-$68 million expected earlier) in the fourth quarter. Rialto business is expected to generate profits of about $5 million (versus prior expectation of $28-$38 million). Multifamily is expected to generate about $35 million of profits in the fourth quarter.

The company expects quarterly EPS, excluding the write-up of backlog and construction in progress and integration costs, to be approximately $2.06 (versus $2.10-$2.20 expected earlier). This decline in projection is due to the impact of Hurricane Florence and reflection of a bit of sluggishness in the markets.

Fiscal 2019 Guidance

Lennar expected revenues to grow 7-10%, with approximate deliveries of 53,000 (reflecting an increase of about 15% from projected deliveries in 2018 and an 8% increase in pro-forma deliveries for 2018).

Gross margin is expected in the 21.75-22% range. SG&A expenses are expected at about 8.4%.

Fiscal 2020 Guidance

The company expects 5-7% growth, given reduced lot growth.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Lennar has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Lennar has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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