Lennar Corporation‘s (NYSE:LEN) earnings beat Wall Street forecasts, but falling margins and some soft data on the housing market weighed on LEN stock.
For the fiscal third quarter ended Aug. 31, LEN stock reported earnings of $235.8 million, or $1.01 a share, up from $223.3 million, or 96 cents a share, in last year’s quarter. Analysts polled by Thomson Reuters were expecting earnings to come in at 89 cents a share.
The top line expanded 13.7% to $2.83 billion vs. the Street forecast of $2.68 billion.
CEO Stuart Miller said in a press release:
“While the housing market’s recovery has continued to progress on a slow, steady and sometimes, choppy path, we have continued to manage our sales and delivery targets in the 7%-10% range, while focusing on bottom-line profitability and balance sheet strength.”
And yet, Lennar stock gapped down by almost 5% soon after the opening bell. Shares recovered somewhat, but remained in the red midway through the session.
Although revenue increased more than analysts had forecast, gross margin on home sales didn’t keep pace. Higher costs for land caused the profitability metric to decrease to 22.6% from 24.1% a year ago.
The Bigger Picture Gives LEN No Help
Tepid news on the housing market also helped depress LEN stock on Tuesday. Housing starts tumbled 5.8% sequentially in August to a seasonally adjusted annual pace of 1.14 million. That represents a year-over-year drop of almost 1%. Analysts forecast housing starts to run at a pace of 1.18 million last month.
But the latest figures are more of an exception than a rule to the health of the housing market, which continues to recover. July was an especially good month for housing starts, which set August up for a tough comparison.
In other encouraging news, the National Association of Homebuilders said Monday that sentiment hit a cyclical high this month.
Still, a fitful-but-growing housing market has left LEN stock cold. Shares are down 11% for the year-to-date, underperforming the S&P 500 by nearly 6 percentage points.
As painful as that underperformance might be for anyone holding Lennar stock, it can’t last forever. LEN went on a spending binge during the recession, snapping up land at bargain-basement prices. That gives LEN a sort of ace in the hole.
LEN is also pursuing a promising strategy of targeting entry-level buyers. Here’s the CEO again:
“We have continued to focus our land spend on high quality, ‘A’ locations while also ramping up our first-time homebuyer land positions as that segment of the market continues to improve.”
Homebuilder stocks are mostly not having a great year as secular trends and skepticism hurt sentiment. Nevertheless, there’s a big shortage of housing in the economy and the housing market continues to grow.
Given those tailwinds, LEN stock could be a good bet for patient value investors.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
