6/29/2012
By David Urani, Research Analyst

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On June 27, Lennar reported its fiscal second quarter 2012 earnings results. The company recorded revenue of $930.2, representing an increase of 21.7% year over year, and landing above the $906.8 million consensus estimate. Homebuilding revenue was up 22.6% to $796.4 million. Home closings were up 20% year over year, while the average price per home sold increased by 2% to $250,000.

On the bottom line, Lennar reported net income of $452.7 million, or $2.06 per share which includes a $402.3 million tax benefit. Earnings per share excluding the tax benefit were $0.21, exceeding the $0.17 per share consensus estimate. Gross margin improved by 310 basis points year over year to 22.5%, while SG&A expenses came down 170 basis points as a percentage of revenue, largely as a result of the increase in revenue.

Sales Trends

Lennar's quarterly results were indicative of the signs of recovery in the housing market as demand continued to strengthen, driving better than expected revenue. And beyond that, new orders were up 40% year over year, leading to a 61% increase in backlog. Lennar management cites a number of factors for improved demand, including fear of missed opportunity as home values are very low, good value of homes and monthly mortgages payments versus renting, and limited inventory in some markets.

Along with the increased sales, Lennar continued to improve its gross margin, which stood at 22.5% versus 19.4% a year ago and 20.9% in the previous quarter. Not only has the improving housing market supported home values, but Lennar does a lot to manage costs, including strong relationships with suppliers and implementation of its "Everything's Included" program which allows for consistent bulk supplies purchases.

Lennar is focused on continuing its strong growth, and increased land purchases and development spending by 74% to take advantage of the improved market. As it stands, the company is seeing an increasing mix of build-to-order business as existing inventory gets sold through. Consequentially, its backlog conversion rate is expected to be lower although the big boost to backlog remains encouraging.

Perhaps the biggest negative for the quarter was the diminished earnings of its Rialto investment arm. Operating earnings of $4.3 million (net of $3.2 million of noncontrolling interests) were down from $9.8 million a year ago. Nevertheless, this business remains an accretive asset to add to homebuilding profits, while also aiding in land acquisition.

We have been concerned that home sales could slow in the face of European macroeconomic headwinds, but recent strength in both Lennar's orders and national housing data suggest sales may continue to improve for the company.

David Urani
Wall Street Strategies