The housing market has not budged an inch in the past few months. Factors such as frequent foreclosures, high availability of homes, and sluggish purchases continue to compress home prices.
Lennar has exploited general pricing weakness by purchasing large amounts of undeveloped land at cheap rates. The home giant operates through two units: Lennar Homebuilding and Rialto Investments. The Rialto unit, which saw its operating earnings surging 92% to $9.8 million, helped the company keep its head above water. The jump in operating earnings primarily resulted from interest income generated from real estate loans on the land itself.
But the Lennar Homebuilding unit dragged everything down. Revenue from home sales fell by 6%, to $649.8 million, and took the operating margin on home sales down 230 basis points, to 4.4%. Overall revenue saw a decline of 6%, coming in at $764.5 million this quarter. This was primarily triggered by the cost of revenue as a percentage of revenue rising from 82% to 94% year on year.
This trend of sagging sales will likely continue well into the future; backlogs, often considered a barometer for future business growth, slipped 1%. Further, the rate of cancellation of orders stood at 17%.
Lennar's interest coverage ratio of 1.2 and debt-to-equity ratio of 124% may appear dangerous, but the company ended the quarter with cash and cash equivalents of $1.1 billion, which is about one-third of its entire market cap. This cash cushion could help to tide the company over until the market improves.
Diluted earnings per share for Lennar came in at $0.07, compared to $0.21 a year ago, exceeding the Street's estimate by $0.03. Great, but what's really to celebrate?
On a positive note, the time from ground-breaking to house sale has been shortened to limit reliance on standing inventories, which is certainly necessary in this kind of market.
The use of energy-efficient techniques in new homes is being used to lure customers as well. Competitor KB Home
But these efforts may not be enough to give the gaunt business scenario a much-needed turnaround. Recent quarters have shown a deep-rooted trend of poor performance. While competitor KB Home has seen a 27% year-on-year fall in revenue, PulteGroup has been plagued with a 20% year-on-year decline in home sales. Even D.R. Horton
We knew the housing crisis would be long and painful, especially for new-home builders. Clearly, we're not at a stage where capacity is being outdone by demand. I don't see that day on the horizon, either.
The Foolish bottom line
The Foolish investor should know that homebuilders do not have assistance from federal tax credits anymore, like they did last year. High unemployment continues to keep potential buyers at bay. Plus, banks are suddenly careful about whom they lend to. I'd stay away from this stock until there's some clarity on the housing scenario writ large.
If you'd like to stay up-to-speed on the top news and analysis on Lennar, or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.
Debarati Bose does not own shares of any of the companies mentioned in the article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.