Lennar Corporation (LEN) reported net earnings of $15.0 million or 8 cents per share in the first quarter of fiscal 2012 ended February 29, 2012, compared to a loss of $10.1 million or 5 cents per share in the year-ago quarter. Reported earnings surpassed the Zacks Consensus Estimate by 60%.
Total revenue in the quarter climbed 30% year over year to $724.85 million, on the back of a record 33% increase in orders during the quarter. The boom in the order was due to a stable market, backed by low home prices and low interest rates. Revenues crashed the Zacks Consensus Estimate of $698 million.
Homebuilding
Revenues from the Homebuilding segment rose 33% year over year to $610.7 million from $457.9 million in the prior year. This was attributable to a 3% increase in the average sales price of homes delivered and 30% increase in the number of home deliveries, excluding unconsolidated entities.
New home deliveries, excluding unconsolidated entities, increased 29.9% year over year to 2,472 homes in the reported quarter.
Gross margin on home sales expanded 900 basis points on the back of an increase in average sales price and lower valuation adjustments.
Financial Services
Financial Services segment revenues climbed 18.9% to $68.2 million. The segment posted operating earnings of $8.0 million in the quarter compared with $1.2 million in the year-ago period. The improvement in profit was primarily attributable to the company’s cost-saving initiatives.
Rialto Investments
Rialto Investments revenues slipped 1.4% to $32.2 million (which consisted primarily of interest income associated with the segment’s portfolio of real estate loans) from $33.6 million in the prior-year quarter. Operating earnings plunged 78.04% year over year to $5.1 million compared with $23.0 million in the same period last year.
Financial Position
Lennar had cash and cash equivalents of $800.3 million from homebuilding as of February 29, 2012, compared with $1014.0 million as of February 29, 2011. Net debt from homebuilding amounted to $2.33 billion as of February 29, 2012, reflecting a net debt-to-capitalization ratio of 49.6%.
Outlook
A depressed housing industry is the biggest concern for any homebuilder, including Lennar and its compatriots DR Horton, Inc. (DHI) and Pulte Group (PHM). In addition, there is no sign of a speedy recovery. Home sales fell consistently in each of the first three quarters of the year. As per the National Association of Home Builders in the U.S, the situation may deteriorate further. Prices of houses fell continuously, driven by an excess supply of homes in the face of depressed demand and tough competition from the pre-owned homes. In addition, many home purchasing contracts are getting cancelled due to increasing difficulty in obtaining loans for the purpose.
However, management is optimistic about the company’s capacity to sustain its growth and feels that the strong balance sheet, significant liquidity and efficient management team will help the company to capitalize on opportunities. Moreover, the strategic investments in Homebuilding and Rialto segments will lead the way to a profitable year in 2012.
Our Recommendation
We currently have a Neutral recommendation on Lennar. The stock carries a Zacks #3 Rank (a short-term ‘Hold’ rating).
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