Lennar: Reasons to Buy

Lennar (LEN) has benefited a lot from the recent recovery in the housing market, and this clearly reflects in the company’s quarterly results. During the recently reported third quarter, Lennar’s total revenue increased to $2.49 billion, up 24% from $2.01 billion during the same period last year.

Lennar also declared third-quarter net earnings of $223.3 million, or $0.96 per share, an increase of 26% over $177.8 million, or $0.78 per share in the third quarter of 2014.

The homebuilder reported significant year-over-year growth in both its top and bottom lines, primarily driven by the expanding new housing market demand which is supported by the slow but steady recovery in the global economic conditions and thus benefiting the homebuilding major.

Increasing home demand will be a catalyst  

The macroeconomic demand scenario for new and rented homes, with a significant production deficit of homes both for-rent and for-sale, is positive.
Therefore, the market has overcorrected and is continuously facing the undersupply situation in both for-rent and for-sale markets.

Although, the global demand for new and rented homes remain robust still there’s uncertainty in the macroeconomic environment with declining oil prices leading to improved discretionary income, reduced material costs and greater labor accessibility. But, local economies and oil linked jobs are uncertain globally. The recent currency fluctuations or strengthening dollar is driving political instability and non financials across the countries.

This has also resulted in more expensive homes for international buyers in the US. In addition, the mortgage markets also seems constrained driven by slow but steady recovery having longer upward duration and continued shifting of lower and middle classes to key rental markets which re-prices each year; whereas for-sale housing best compares to rental.

Strong operational growth

Moreover, Lennar is also believed to be the first homebuilder to re-achieve profitability after emerging from the downturn. The company’s pre-tax profit has grown ten times with overall deliveries nearly doubled during 2010 till 2014 from 11,000 homes to 21,000 homes. Lennar’s significant amount of operating leverage within its businesses coupled with notable performance of its ancillary businesses is estimated to drive impressive top line growth for the company in long-term.

Lennar is expected to be very well-positioned for continued long-term growth given a significant gap in demand and supply for new and rented homes in the international markets in addition to the gradually improving global economic conditions and the company’s solid track record of delivering year-over-year profitable growth.

Moving ahead, Lennar is successfully maturing complementary blue-chip businesses which are mainly dependent on third-party financing and each having a notable amount of outstanding shareholder value. These businesses include, Financial Services, FivePoint Communities, Solar, Commercial, Multifamily and Rialto.

Importantly, mortgage rates for this year are much below the historical levels that makes housing a reasonable choice. According to the Freddie Mac mortgage survey, the 30-year flat mortgage rate declined to 3.98% in Jun 2015 from 4.16% in Jun last year. However, interest/mortgage rates are anticipated to increase in successive months but only reasonably. These weaker mortgage rates make home loans reasonable and encourage homebuyers to purchase new homes, thus expanding the demand for new homes.

Conclusion

Lennar is well-placed to make the most of housing growth, and the good thing is that the company is already making the most of this growth as its financial performance tells us. Thus, in my opinion, it will be wise for investors to buy Lennar for the long run given the strong growth that the company is seeing.
Published on Oct 2, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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