3 Reasons to Take Lennar Home

If you're looking for a way to play the housing rebound, Lennar (NYSE: LEN  ) may be the best mainstream homebuilder. In fact, based on the company's recent earnings, there are at least three reasons to believe investors should consider buying the stock. Its results also suggest that Lennar's growth is just getting started.

Could this be more clear?
The first reason investors should considering buying Lennar is the company's new order growth. In the last three months, Lennar reported that new orders increased 14% on an annual basis. Compared to KB Home's (NYSE: KBH  ) new order increase of 7%, or PulteGroup's (NYSE: PHM  ) significant order decline of 17%, Lennar is clearly crushing the competition.

If these companies competed in completely different markets or at different price points, it might be easy to argue that Lennar's outperformance is an anomaly. However, all of these companies have a presence throughout the United States, and their sale prices fall in the $250,000 to $300,000 range. As you can see, though each of these companies reported revenue growth in the current quarter, when it comes to new orders Lennar stands above the rest.

An incentive to invest
The second reason investors should consider taking home Lennar's stock is that the company is gaining new order growth without offering as much in incentives as last year.

It's not usual for homebuilders to offer incentives such as additional amenities, or even bonus rooms to try get a contract. As the housing market was beginning its recovery, homebuilders offered thousands and sometimes tens of thousands in incentives to attract buyers. Incentives act sort of like a sale for a retailer; they encourage new sales at the expense of the company's margins.

In the current quarter, Lennar reported that sales incentives dropped from over 9% of home sales revenue last year to just over 6% this year. With lower incentives taking less of a bite out of profits, and faster new order growth than some of its peers, Lennar's results look particularly strong.

Backing it up
While new orders and lower incentive spending are important for Lennar, investors obviously want to know what they can expect in the future. Looking at Lennar and its peers backlog growth suggests that not only did Lennar beat the competition in the last three months, but this outperformance should also continue.

Company

Backlog Revenue Growth (3rd Q 2012-3rd Q 2013)

Backlog Unit Growth (3rd Q 2012-3rd Q 2013)

KB Home

9%

negative 3%

Lennar

53%

32%

PulteGroup

9%

negative 2.1%

Source: Company SEC filings.

This brings us to the third reason to consider buying Lennar. As you can see, the company reported backlog growth that is the envy of most homebuilders. That being said, backlog growth doesn't mean much if these potential contracts aren't completed.

While Lennar's cancellation rate of 18% seems a bit high relative to an industry leader like Toll Brothers at 5%, this rate is in line with PulteGroup at 18%. Given that KB Home reported a 33% cancellation rate, Lennar actually appears to be doing fine.

With both PulteGroup and KB Home reporting a decline in backlog units, it's difficult to see how either company will report strong revenue and earnings growth in the near term unless this turns around. Though Lennar's 18% cancellation rate could cut the company's revenue and backlog growth to 43% and 26% respectively, it's clear that Lennar is leading the way in the mainstream homebuilding market.

If the housing market continues to recover and you are looking for a way to play this improvement, I would suggest adding LEN to your personalized Watchlist today.


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