Lennar Corporation (LEN)
The housing market is still on the road to recovery, but a recent wave of disappointing reports has some asking how long will a full recovery will take? Given the fact that the housing market took such a major hit, a prolonged recovery was widely expected. The small improvements in the market have translated into better earnings for some companies. Despite the recent declines in new and existing home sales, Lennar Corp. was able to deliver its second quarterly profit in three years. How was the company able to easily beat analysts’ expectations? Now that a number of factors have changed including the expiration of the homebuyer tax credit, will Lennar jump back on the up and down earnings rollercoaster that it has become accustom to?
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Stock Analysis
Lennar Corp. is probably feeling pretty good about its recent performance given the volatility that still remains in the housing market. The third-largest US homebuilder reported second quarter earnings of $39.7 million, or 21 cents a share, on revenue of $705.3 million. In the prior-year period, Miami-based Lennar reported a loss of $125.2 million, or 76 cents a share, on revenue of $805.2 million for the quarter ended May 31. Although earnings beat expectations, new orders of homes fell 10 percent from 2009, with the entire decline coming in May. Lennar’s performance comes on the heels of overall weak numbers for the sector. A recent report from the US Commerce Department showed that new home sales plunged 32.7 percent to a seasonally adjusted rate of 300,000 units from a revised rate of 446,000 units in April.
One of the reasons behind Lennar’s better-than-expected earnings was cost-cutting, which is a common practice among companies trying to improve their bottom line during rough times. The company cut corporate, general and administrative expenses by 22 percent during the quarter. The focus on cost cutting and boosting margins rather than maximizing sales caused the operating margin on home sales to widen to 6.7 percent in the quarter. Lennar has also diversified into distressed debt purchases to boost revenue in the face of the slowing housing market. In February, the homebuilder bought 40 percent of $3.05 billion in portfolios of delinquent loans acquired by the Federal Deposit Insurance Corp. from failed banks. The debt business generated $5.1 million of operating profit for Lennar in the second quarter.
Lennar is remaining pretty optimistic about future performance. Chief Executive Officer Stuart Miller said that the company believes that the slowdown in new sales orders is temporary and the market will continue to make improvements during the second half of the year. However, Lennar is still well aware that the expiration of the homebuyer tax credit will have an impact on its performance. Miller stated that “The tax credit expiration accelerated sales activity to the pre-May period, and it may take a couple of months for demand to rebuild, driven by tremendous home price affordability and historically low interest rates.” If Lennar continues to build on its recent performance, the future will be bright for the company.
Other Stuff on Lennar
- Lennar Launches Solar-Lease Program – The homebuilder announced a solar lease program that virtually eliminates up-front costs and provides homeowners with below-market energy rates.
- Lennar Quietly Offering 3.25% Mortgages – Lennar Corp. is quietly offering new home buyers a mortgage rate as low as 3.25% for five years.
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