Lennar Sees Extended Recovery, Taper or Not

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Though many companies have experienced softness in recent months -- a product of an insecure consumer and Fed uncertainty -- one sector appears to be holding strong. The nation's third-largest homebuilder, Lennar (NYSE: LEN  ) , reported stellar third-quarter earnings on Tuesday and delighted Wall Street. Going along well with the broken record thesis of low housing starts and high demand, the company sees its homes and developments selling well and management believes housing will remain in an extended period of recovery. Bears worry that Fed tapering and rising interest and mortgage rates will halt the housing rebound, but even regulatory actions can't deny the simple implications of supply and demand.

Strong earnings
For the company's fiscal third quarter, Lennar brought in 35% higher profits at $0.54 per share. Revenue soared 46% $1.6 billion. Home deliveries achieved a new high, and the average home selling price grew 13% to $291,000. Some of that price increase went to covering the 8.4% increase in labor and materials cost. Lennar currently has 514  active communities -- a net of closed out and newly opened developments. This is 16% higher than the prior year's number.

Analysts had expected an average of $0.45 per share, as reported by Reuters.

By nearly all measures, Lennar has continued its string of substantial growth and capitalized well on the housing rebound. Management sees a short-term softening as the Fed taper comes into play and, as rates have gone up, there has already been a slight downward shift in demand. This is totally to be expected, and should not signal anything negative to the company or the overall rebound. The explosive growth will likely moderate, as it should to remain sustainable, but this is by no means the peak of the market or Lennar's business cycle.

Sustained recovery
Investors compelled by Lennar's recent performance (up more than 155% over two years) should note that the period of rapid rise is likely to end as the recovery assumes a more stable period of growth. For the remainder of this year, there could be some volatility as consumers adjust to a more independent economy, one not consistently fed by, well, the Fed.

At 14.4 times forward earnings, Lennar isn't particularly pricey at this point, and its backlog assures us that the company will continue to grow, though at a rate slower than in previous quarters. For comparison, other players that have and will continue to benefit from the housing rebound trade at higher multiples. Toll Brothers has a forward P/E of nearly 22 times, while KB Homes trades at 15.3 times.

The time when homebuilders were bargain priced is long over, as the market is well aware of the low housing starts and pent-up demand. However, investors interested in growth could still take a look, as the future of the industry bodes well and prices have not yet approached the richness associated with other growth businesses.

More from The Motley Fool 
With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


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9/29/2016 2:48 PM
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