Has homebuilder Lennar (NYSE:LEN) finally hit bottom? Cancellation rates and higher incentives are hurting margins and sales and are leading this company to lower guidance -- just as Toll Brothers (NYSE:TOL), KB Homes (NYSE:KBH), and so many others before them have experienced.
But wait a minute -- didn't folks ranging from realtors to brokers to industry representatives assure us all that there was no housing bubble? Wasn't talk of rank speculation just a myth? To be fair, the folks in Lennar management weren't responsible for any of that -- but they're still suffering the aftermath of a market that got itself overheated.
Then again, it's not as if the quarter that Lennar reported was all that rotten. Revenue was up 56% as reported, with a 40% hike in deliveries leading to a 53% jump in revenue from home sales. Gross margins did ease off, though, and operating earnings from homebuilding were up 25%.
Of course, Wall Street cares primarily about the future. To that end, new orders were down 3% (though up in the company's Central region), backlog value fell by 11%, and the company did warn of continuing deterioration in several large markets. It also observed that there has been a "wholesale evaporation" of speculators and that many, if not most, folks who sought easy money in the housing market have since packed up and left.
That last bit is the best news of all, in my opinion. See, at least two of the major fundamentals of the new housing market -- employment and interest rates -- are still pretty good. Speculative froth, though, made affordability more of an issue. If speculators have moved on to other projects, maybe pricing can get back in line with historical trends -- though this will be an unpleasant adjustment -- and the business can get back to a more normal situation.
The risk in buying a stock like Lennar is that things can get even worse. Lennar holds a lot of land, second to Toll Brothers and ahead of the likes of Pulte (NYSE:PHM) and Hovnanian (NYSE:HOV), and a protracted slowdown could lead to asset writedowns -- though the long-term history of American real estate is that prices increase. By the same token, Lennar has a good record of producing returns on its capital, and that makes it at least worth consideration for those looking to play the eventual recovery in this sector.
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Philip Durell knows that price drops can be a boon for investors. Motley Fool Inside Value , the newsletter service Philip heads up, focuses exclusively on great stocks trading at discount prices. You can try out the service yourself free for 30 days .
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
