This Company Just Brought Down the House
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If there are any doubters that still believe that the housing recovery is not underway, they need only look at Lennar Corp.'s (NYSE: LEN) recent earnings to understand just how strong the recovery already is. In fact, Lennar is just one example of a homebuilder that has recently reported a significant increase in not only sales but also growth in their backlog of orders. In fact, based on the company's results, I would suggest that Lennar is either the first or second best value among the homebuilders.
Lennar reported revenue up 34% and earnings per-share jumped by 263.64%. The company saw strong deliveries, up 28%, and new orders rose 44%. These numbers compare favorably to one of their primary competitors, KB Home (NYSE: KBH), which recently reported their revenue up 16% and deliveries up 7%. Lennar also reported a 17% cancellation rate, which was nearly half of KB Home's 29% rate. There were two other big achievements for Lennar in the current quarter. First, the company saw their average home sale price rise about 4.5% versus last year. Second, the company had to issue less incentives to get the sales, with incentives down over 20% versus last year. Echoing the comments heard at other homebuilders, CEO Stuart Miller said, "the housing market has stabilized and the recovery is well underway.” In fact, if it weren't for Toll Brothers (NYSE: TOL), I would easily suggest that Lennar is in a class of its own.
Toll Brothers is one of the few remaining high-end homebuilders left after the Great Recession. The company has been a leader in the recovering housing market, showing strong growth and one of the lowest cancellation rates in the industry. While Toll Brothers builds homes that are priced at more than twice the value of Lennar or KB Home, it's instructive to look at each of these companies' backlogs to get an idea of the number of new houses being requested.
These numbers come from three different homebuilders that have strength in different areas of the country. The companies offer homes with average prices between $250,000 to well over $500,000. Considering that each of the companies has seen a massive increase in its backlog versus last year, if you still believe the housing market is not improving you are simply ignoring the numbers. While Lennar's backlog increase and sales gains are certainly impressive, the company's financial statements also show an improving picture at this homebuilder.
Lennar reported issuing $400 million in new notes at 4.75%, and using part of these proceeds to retire notes of just over $200 million that were at 5.95%. This is a tactic I expect more homebuilders will utilize over the next few years. With interest rates as low as they've been in decades, many stronger homebuilders should be able to refinance their debt at lower rates, thus saving money on interest going forward. Lennar also shows cash and cash equivalents of almost $700 million, and they improved their gross margin by 2.1% to a current rate of 23.2%. The company's gross margin improvement was particularly impressive considering their competition. Toll Brothers shows a gross margin of 24.4%, and yet the company builds houses that are valued at more than twice Lennar's average sale price. By comparison, KB Home showed a gross margin of just 10.36%. With impressive results all around, the only question for investors should be, is Lennar still a good value?
Honestly, this is one of the few cases where I think analysts are completely underestimating the whole industry. At the current time, analysts expect just 6% EPS growth from Lennar over the next few years. Given the huge drop in new home sales over the last several years, it's very likely it will take many years for this recovery to be completed. The company has beaten earnings estimates by at least 40% in each of the last three quarters, it may take another few quarters before analysts realize this growth will continue for a while. The underlying strength in new homebuilding as we have seen, is both geographically widespread and across multiple price points. This indicates strong growth from different economic classes and in many areas. Lennar has some of the strongest growth among homebuilders at its price point that I've seen. If analysts are underestimating its future earnings growth, this could be a good time for informed investors to build up their position.
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.