What's in Store For This Home Builder?

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The industry prediction for around 10 million new houses and apartments to be built in 2013 reaffirmed the fact that the housing recovery phase in the US markets is nowhere near a slow down. In spite of a sluggish economy, the housing market is sustaining its growth and is expected to strongly contribute to the economy. Lennar Corp (NYSE: LEN), the nation’s 3rd largest home builder, successfully grabbed its share of the housing market, as it reported solid numbers for the fourth quarter, 2012.

Numbers you should know

The net earnings for the quarter increased approximately by 310% to settle at $124.3 million. The EPS increased to $0.56 per diluted share as compared to $0.16 per share for the prior year period.

Gross margin on home sales has shown considerable improvement this quarter with an increase of 4.1%

The deliveries and new orders jumped by 32% each, a significant improvement over the last year, owing to factors like reasonable home prices, lower mortgage rates, and an increase in rental houses.

Looking Forward

The new orders for homes is an important parameter when it comes to understanding the potential of a home building organization, which in the case of Lennar stood at 3983 homes, up 32% from the previous year quarter. This indicates positive movement of the housing recovery for incoming quarters, as the need for single-family homes is poised to grow. When we look at the Rialto side of Lennar’s business, things look highly promising on two counts. Firstly, its contribution to the profit numbers of Lennar is increasing on a gradual basis, which makes it a prime strategic business unit. Also, as management pointed out, Rialto is providing Lennar access to off-market home sites, leading to increased opportunities and more revenue. Homebuilding and Financial services are two mighty functioning guns in possession of Lennar, which will contribute towards its revenue and profit targets.

Industry Peers

The largest homebuilder in the United States, DR Horton Inc (NYSE: DHI), reported strong fourth fiscal quarter last year, where net income increased by around 180%, or $0.30 per diluted share. Improvement in the housing markets has been well leveraged by the company, placing it on a high pedestal. Taking the lead from recent news reports, this homebuilding organization has initiated the execution of its strategy of expanding into new markets, the first being Nashville. Expansion into newer geographies will help DR Horton utilize its operational capacity as well as aid in brand building efforts.

Having a market cap of around $1.26 billion, another big player in the housing industry is KB Home (NYSE: KBH), which has started the New Year with construction of model homes at one of its fresh land acquisitions in the desirable area of the San Diego suburbs. As management had pointed out in its recent quarterly results, price increases were successfully implemented across different divisions in about two thirds of its communities. This will aid in expanding the operating margins for the company, resulting in higher operating leverage.

The Bottom Line

As I mentioned above, one of the most critical parameters while analyzing the homebuilding industry is the orders for new homes, which showcases the potential revenue opportunities in a quantifiable way. In the case of Lennar, this number went up by 32%, which is an impressive gain over the prior year quarter and assures investors about the sustainability of growth opportunities. Lennar has taken appropriate leverage of an increase in pricing power to implement effective price increases.

Another impressive move that has made me optimistic about the future stream of revenues for Lennar is its planned investment to the tune of around $1 billion into construction of rental apartments. Even though there has been considerable improvement in the new home sales of the housing industry, there is a section of customers who might be credit and down-payment challenged, for whom rental apartments are an ideal solution. Lennar can take advantage of domain expertise as well as operational capacity to provide apartments at reasonable rents.

Lennar’s stock has displayed solid performance over the last year as it gained almost 83% amidst a sluggish economy. Another interesting and impressive point is the fact that Lennar’s operating margin increased by 660 basis points for the quarter. This indicates that each dollar of sales is contributing more to the net profits of the company, which will come to the investors in the form of higher earnings per share. The increase in margins was mainly brought about by fresh land acquisitions as well as higher home prices. A higher pricing power will enable Lennar to sustain the higher home prices in oncoming quarters and contribute to the net numbers.

I would recommend Lennar be a part of your diversified portfolio, as this home building giant is poised to grow in the coming quarters on the back of rising home demand, expansion into new regions, and effective cost control mechanism. 

MihirMehta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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