Homebuilders to Buy: Lennar (LEN)
You usually can’t go wrong betting on the biggest operators in any industry. New home development is no different. If its Q1 results are any indication, Miami-based Lennar (LEN) is a good bet when it comes to housing.
Although there are indications things might not be so cheery in housing right now, CEO Steve Miller believes the industry is heading in the right direction, stating:
“Although it is still too early to predict the strength of the spring selling season, we are optimistic that the housing market is continuing to recover, and that the fundamental drivers of that recovery remain intact. We believe that the housing market is still in the early stages of recovery.”
That’s good news for LEN stock and all the other homebuilders.
Lennar’s Q1 earnings before interest and taxes increased 65% to $165 million on $1.36 billion in revenue. That’s an EBIT margin of 12.1%, a full two percentage points higher than in the same period a year earlier. Drivers of this margin expansion include an 18% increase in average sales price combined with increased deliveries in five of its six operating regions.
Its western region (California, Nevada) experienced large increases in both the number of homes delivered and the average price paid for those homes. The West contributed 27% of the 3,609 homes delivered by Lennar in Q1, and while the improvement in California is impressive, the East is where its future revenue generation lies, with 39% of its backlog in seven states up and down the Atlantic. With all the excitement on both coasts, investors can expect Lennar to generate more than $1 billion in operating income in fiscal 2014, something it hasn’t done since 2005.
Whatever happens in the next three quarters, you can rest assured that Lennar is going to be one of the main beneficiaries of any spring thaw. LEN stock, like most homebuilders, hasn’t done well in the past year. Given its strong earnings, I don’t see any reason why that can’t change as we move into the summer selling season.