Lennar Corporation (NYSE:LEN) is benefiting from diverse revenue mix, steady top-line performance, above-average order growth and improving SG&A leverage. That said, higher construction and land costs pose a threat to its margins.
Let’s delve deeper to find out how this Zacks Rank #3 (Hold) stock is positioned. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
What’s Driving the Stock?
After delivering strong performances in 2014, 2015, 2016 and 2017, Lennar came up with outstanding operating results in fiscal 2018 as well, maintaining its growth momentum. Courtesy of strong demand, Lennar’s total revenues grew 59.2% year over year in the first nine months of fiscal 2018, on the back of a solid 67% rise in homebuilding revenues. This was primarily driven by a 52% increase in the number of home deliveries and 10% rise in the average sales price of the homes delivered. Lennar remains focused on continued improvement in the SG&A line as a result of operating leverage and investments in technology, thereby helping to boost profitability. SG&A expenses, as a percentage of revenues from home sales, contracted to 8.8% in the first nine months of fiscal 2018 from 9.5% in the year-ago period.
The company offers a diversified line of homes for first-time, move-up and active adult homebuyers. Its ‘Everything's Included’ marketing program focuses on improving the value of homes through standard upgrades and competitive pricing. Moreover, a simplified manufacturing process, product standardization and volume purchasing reduce construction as well as overhead costs, thereby making the homes more affordable.
Again, its solid backlog provides a robust growth potential. Backlog at the end of the third quarter grew 88% from the year-ago quarter to 19,220 homes. Potential housing revenues from backlog increased 105% year over year to $8.4 billion.
Meanwhile, Lennar’s CalAtlantic buyout in February helped it become one of the top three homebuilders in leading U.S. markets. The company remains on track to achieve $380 million ($115 million of overhead savings and $265 million of construction cost savings) in synergies in 2019.
In third-quarter fiscal 2018 earnings call, the company disclosed that it will focus on core homebuilding business, while strategically repositioning and opportunistically monetizing the non-core business. To this end, this Miami-based homebuilder had already indicated strategic alternatives to improve the future path of Rialto, in a bid to drive efficiencies and cash flow. In addition, Lennar has segregated Rialto’s balance sheet assets in order to maximize value. The company is currently evaluating many attractive opportunities to monetize the business, as part of those alternatives.
Undeniably, there have been indications that the thriving housing market is being hammered now and then this year. Factors like increasing construction costs, dearth of skilled labor, rising prices of homes and higher mortgage rates continue to make things difficult for Lennar, D.R. Horton (NYSE:DHI) , PulteGroup (NYSE:PHM) , KB Home (NYSE:KBH) and others. Ongoing housing market headwinds have impacted the homebuilding industry’s performance as a whole (down 31.3% in the past year), with Lennar being no exception (down 30.4%).
The company’s gross margin on home sales was 20.3% in the third quarter compared with 22.8% a year ago. Excluding the backlog/construction in progress write-up, gross margin on home sales was 21.9%. The decline was due to higher construction and land costs that were partially offset by an increase in the average sales price of homes delivered. Additionally, weak 2019 guidance for its gross margin and an expected deceleration in growth (in mid-single digits) in 2020 raise concerns.
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