Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Lennar Corporation Retreats From Recent Highs After Reporting Mixed Results

By Motley Fool Staff - Mar 24, 2017 at 1:40PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The company has finally returned to revenue levels last seen a decade ago.

In this segment from Market Foolery, Chris Hill is joined by Bill Barker as they discuss what Lennar Corporation's ( LEN -0.70% ) first quarter numbers say about the state of the housing market.

Homebuilder confidence may be at a 12-year high, but investors must not forget the cyclical nature of this industry.

A full transcript follows the video.

This video was recorded on March 21, 2017.

Chris Hill: First quarter profits little better than expected, overall revenue was a little lower than expected, shares down a bit, but that's off of what is essentially a 52-week high. How are we doing when it comes to home builders?

Bill Barker: Home builders most recently reported, for the March numbers, the highest level of home builder confidence in 12 years. 

Hill: Is that good?

Barker: They think things are good. It may be the case that it's a good question to ask whether confidence means that things are going to go well, because that has not always been the case. If you reflect back to 12 years ago in 2005, that was a really good time to start getting out of home builders, and certainly you wanted to be out of them by 2007. Lennar had a pretty good quarter. It's up over 20% for the year, and a lot of the expectations were priced in prior to today's release, more or less on track with what they guided to.

Hill: Not that we're making big industrywide calls here, but it seems like for the last few quarters, whether we've talked about Lennar or Toll Brothers or any of the big home builders, generally the results were good. If you are the average investor just occasionally taking in headlines about housing, it all seems to be going in the right direction. I guess my question is, is now the time to maybe take a pause, and if you're thinking about home builders, maybe think twice?

Barker: Let's go over a couple of the numbers and answer it that way. Deliveries for the quarter were up 13%, and orders were up 16%. The backlog is now up 24% to last year, and revenue is up 17%. Those are numbers, high teens and above numbers, which, if you compound them out, get you really rich over periods of time.

Hill: One quick question. Backlog refers to what? Is that orders that haven't been fulfilled yet?

Barker: Yeah, what they have ordered that --

Hill: "We haven't built the homes, but we have the orders for them."

Barker: Yeah. These aren't brand new orders, these are the new orders plus the old new orders that they haven't done anything about. So this is what they have to do, this is what they're going to be working on, this backlog. So, that's all very good, and if these numbers compounded the way numbers of some companies compound over time, as you say, you get very rich. But, as we know, there is almost nothing more cyclical than home building, which boomed and crashed and it's not hard to remember exactly when those things happened, and what the consequences of them were. There's been a lot of regulation in the meantime to hopefully prevent that kind of peak and valley for home builders and for our economy as a whole. But it's still going to be a cyclical industry. And right now, the cycle is on the way up.

Hill: You just reminded me when you were talking about the confidence of the home builders themselves of the movie version of Michael Lewis's great book, The Big Short. It's a phenomenal movie, for anyone who hasn't seen it, definitely check it out. It goes through the housing crisis, and profiles some of the people who saw it coming. But that was -- there are a couple of scenes in there where you have the outsider investor, whether it's Dr. Michael Burry or the character that Steve Carell plays, who's looking deep into the data, they see the numbers coming, and then when they talk to people in the housing industry, it's nothing but sunshine and rainbows. Like, it's all, "Everything's great, the market is going great!" There's a scene where Carell and his team go down to Florida, and a real estate agent is showing them around and it's looking pretty sketchy.

Barker: So, the market was, and the film shows that parts of the market were seeing things more efficiently than other parts. One thing to remember is, home builders in '07 were already, as stocks, although, that is when work peaked, the stocks were already declining precipitously. I think Lennar, to take an example -- I'll look this up quickly -- it fell 64% in 2007. We think of 2008 as when all the trouble started. Home numbers by the beginning of 2008 were already declining precipitously, and that was something that investors got out of these in 2007, despite the fact that that was peak sales for the company. It's only now getting back to 2007 annual revenues. 2007, it did $10.1 billion. Over the last 12 months, before today's report, got back to $10.9 billion, after bottoming around $3 billion in 2010 and 2011. So, it was a deep decline, it's made it all the way back, we're back to where we started. The company has made money in that time. You've made money if you held all the way through. But, it is worth keeping in mind that, when you see these numbers, they are part of a cycle. They're not part of a compounding, better results every year number, which is a different way to invest, a different thing to look for.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Lennar Corporation Stock Quote
Lennar Corporation
$112.32 (-0.70%) $0.79

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/05/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.