Home Sales Drive Results At Lennar Corporation
If anyone is surprised by the strength shown in Lennar Corporation’s (NYSE:LEN) FQ4/calendar Q3 report they are not paying attention to the housing market. Tight supply reigns supreme in a market that is experiencing rising, record-high demand. Simply looking at the New Home Sales data, the sale of New Homes is up more than 40% on a YOY basis, and all signs point to stronger demand next year as well. What’s driving all this demand, you may ask? It’s a convergence of trends that has home creation on the rise and city-folk fleeing to the suburbs.
"The confluence of Millennials starting families and creating households of their own, along with the pro-housing effects of the COVID-19 pandemic, has materially strengthened demand," said Executive Chairman Stuart Miller.
Sales Fall For Lennar But The Fundamentals Point To Growth
Lennar’s Q4 results are not without negative news but the positives outweigh them by a wide margin. The first bit of negative news is that quarterly sales are down -2.0%. The silver lining or mitigating factor, however you want to label it, is that revenue beat by 280 basis points and the guidance is good. The second bit of negative news is that the average selling price is a bit below the consensus target. The silver lining here is that sales, deliveries, and backlogs are growing at a rate that will more than offset this shortfall.
Digging into the numbers it is clear that business for Lennar is on a sustained upswing. Not only did quarterly deliveries beat the consensus estimate but the new orders and backlogs are growing at a double-digit YOY pace. The company’s New Orders rose 16% YOY to 15,214 versus the 14,448 consensus estimates while the Backlog grew by 21%. On a dollar-value basis, the value of new orders and backlogs outpaced both new orders and backlogs in evidence of higher realized prices per home. The shortfall in average selling price is due to the mix of homes and the choice of upgrades and not falling prices within the industry.
Moving down to the bottom line, the GAAP earnings came in at $2.82 versus beating the consensus by $0.48. This is up 33% sequentially and YOY due to higher realized selling prices and cost-efficiency related to leveraging fixed costs. SG&A expense, for example, fell to 7.4% as a percentage of sales while the net operating margin came in at 14.7% and the highest in company history.
Looking forward, the company’s guidance for F2021 is fabulous. The company is expecting both deliveries and margins to expand from 2020 and at a rate above the previous guidance and the analyst’s consensus. In terms of margin, the gross margin is expected to be near 24% or up 340 BPS from 2020 with deliveries running near 63,000 or up 10,000 or 20% on a YOY basis.
Lennar Is A Deep-Value Dividend Stock
Shares of Lennar are trading at only 9X the company’s 2021 consensus EPS target which makes it a deep value compared to the broad S&P 500. Add to this stronger than expected results and better than expected guidance and the value only gets deeper. Add to that a safe dividend that is growing at a double-digit CAGR over the past two years and the value is even better. The stock is yielding about 1.35% which isn’t awesome but the growth outlook is robust. Not only is the payout ratio very low at sub-14% but the balance sheet is strong and there is plenty of free cash flow. Assuming the company continues its distribution increases in-line with the last two years the next increase could be worth high-double to low-triple-digits.
The Technical Outlook: Time To Buy, Buy, Buy Some Lennar
Shares of Lennar are moving higher in the wake of the 4Q report and confirming a bottom put in place over the past two months. The price action is up 4.0% in the premarket and above the short-term moving average where day-traders and short-term investors are likely to get interested. Couple this with a solid bullish entry-signal in the indicators and a retest of the recently set all-time high is all but assured.
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