The market for shares of residential homebuilders is sort of like a wild party that not everyone wants to attend. Homebuilders such as Hovnanian (NYSE:HOV), KB Homes (NYSE:KBH), Toll Brothers (NYSE:TOL), and now Lennar (NYSE:LEN) have all been posting solid earnings, but forward valuations suggest that some investors don't expect it to last.
In Lennar's third quarter, revenue was up 27% on the basis of a 28% increase in homebuilding revenue. That homebuilding revenue in turn was supported by double-digit increases in units sold and average selling prices. It looks like future revenue is also still in at least fair shape as new orders climbed 24% and the backlog rose 33%.
Margins for homebuilding also improved as the company saw a 340-basis-point improvement in gross margin. This then led to a nearly 50% increase in earnings from continuing operations and a 51% increase in earnings per share.
Once again, though, there was no balance sheet or cash flow statement in the release. I'm sure there are plenty of investors who are happy with the money they've made from Lennar's stock and don't give a lick about those financial details. I, on the other hand, consider it a significant omission and a lack of respect for shareholders -- shareholders are co-owners, after all, and they shouldn't have to wait for the 10-Q filing to get that information.
As I pointed out with KB Homes last week, the cash flow picture at Lennar is kind of strange. Simply put, operating cash flow and free cash flow growth have not tracked the growth in reported net earnings. Normally, this sort of deviation is a red flag with respect to earnings quality. In this particular case, I'm not sure what to make of it, since the culprit is the increase in inventories tied to the increasing demand the company is seeing for new home construction.
To reiterate, homebuilders are still a controversial sector in the market. The industry as a whole sports a PEG ratio about one-quarter below that of the market. What's more, Lennar's PEG of 0.50 is even lower than the industry average. Is that a sign that the company is still undervalued, or is it a sign that the good times are about to end? Only time will tell, but there's no argument that Lennar is currently making hay while the sun shines.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
