Is It Finally Safe to Own Lennar?

By Ryan Guenette - August 16, 2012 | Tickers: DHI, KBH, LEN, MTH, NVR | 0 Comments

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The housing market showed signs of weakness well before the financial collapse of 2008. Beginning in the later part of 2005, new one family houses sold peaked at 1,400,000, and gradually began its theatrical drop. In the year 2011, new one family houses sold bottomed at around 270,000. After six years of immense pain for homebuilding companies, the market bottomed down 80.71% from its peak. The market value of houses plummeted, leaving millions of homeowners underwater on the biggest investment many of them ever had made. Builders faced a situation of dwindling demand, inevitable layoffs, and the possibility of following the path of Lehman Brothers. One homebuilder who was able to sustain itself through the economic downturn was Lennar Corporation (NYSE: LEN). Lennar constructs homes across the entire United States, and is a major player in the industry. As the housing market appears to have bottomed, and with mortgage rates dropping to historically low levels, is it finally safe to own Lennar?

Stabilization Projected

In 2002, Lennar Corporation reported earnings per share of $4.94. In 2012, the average analyst consensus believes they will derive $2.68 from its business operations. That displays a 45.75% decrease in earnings per share over a ten year period, a troubling number. New home sales during this period decreased 66.67% over this same time period, so it is no wonder that earnings decreased as much as they did. Based on these statistics, Lennar’s compound annual growth rate (CAGR) is -5.93%, a disturbing trend that is confirmed over the long-term. This unsettling trend is set to be broken, as new home sales have reportedly found a bottom. Additionally, Lennar Corporation pays out an annual dividend of $0.16, which at the current price, puts Lennar’s dividend as yielding 0.51%. While not overly significant, the company's dividend is a little icing on the cake. In conclusion, Lennar’s past decade has been riddled with declining earnings, but a rebound may be set for the coming years.

The chart below displays Lennar’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

The Housing Market is Getting its Swagger Back

There is no doubting the facts. The past decade has been disastrous for the housing industry. Foreclosing on a house has become just as common as purchasing a house. As the housing bubble burst, the Home Builders Market Index dropped to the lowest levels since 1991, and then made new lows, as shown by the chart below.

Despite the horrific past decade for the housing market, there appears to be a rebound in the Home Builders Market Index. Just since the beginning of 2012, the index has rallied from below 20, to nearly 40. This extensive rally has been in result of strong housing data, fueled by the consumer’s sudden interest in buying a house. Americans are now observing the historically low-interest rates and bottom in house prices, and realizing the potential in the market, driving up demand. The chart below displays the long-term trend line in house prices.

This has in turn benefited Lennar and other house builders, leading to a rebound in the companies’ share prices. A further stabilization of demand for new houses is projected, which will stabilize Lennar’s share price.

Who Is the Best House in the Neighborhood?

Compared to some of Lennar’s most prominent competitors, such as: KB Home (NYSE: KBH), NVR Incorporated (NYSE: NVR), D.R. Horton Incorporated (NYSE: DHI), and Meritage Homes Corporation (NYSE: MTH), Lennar compares relatively in-line.

In terms of growth, Lennar is topped only by Meritage. Lennar, KB Home, and D.R. Horton all pay out meager dividends that either decrease or stay steady over the years. In the fundamental ratio comparison, D.R. Horton appears to be trading at lowest multiple, with NVR trading at a premium to its peers. When growth is taken into account, Lennar is worth a look, while Meritage appears vastly overpriced. In the net profit margin comparison, KB Home loses money, while NVR stands out to the upside.

The Foolish Bottom Line

When the housing bubble exploded, the homebuilders were nearly destroyed, but Lennar was able to weather the severe economic downturn, and is currently in the process of stabilizing its earnings. As potential buyers find significant value in the historically low interest rates and deflated home prices homebuilders, such as Lennar, focus on growing, not shrinking. The foolish bottom line is that new homes sales have bottomed, the potential home buyer is encouraged to buy, and that Lennar is back in the black. Lennar is a tremendous play on the housing market, but is not for everyone as short-term volatility is almost guaranteed.     

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