Lennar's Results Show Robust Demand Despite Headwinds
he homebuilder's results topped consensus revenue and EPS estimates, despite rising mortgage rates.
Homebuilder stocks have posted abysmal year-to-date returns as investors fear a combination of rising mortgage rates and increased input costs will stifle homebuilder growth and profitability. Lennar's (LEN) second-quarter results helped alleviate some of these concerns. Despite these known headwinds, no-moat-rated Lennar enjoyed strong fiscal second-quarter results that easily topped consensus revenue and EPS estimates. Consolidated revenue of approximately $5.5 billion beat the consensus estimate by over $350 million, and the firm's adjusted diluted EPS of $1.58 beat the consensus estimate by $0.30. We don't anticipate making any substantial adjustments to our key valuation assumptions following Lennar's second-quarter earnings release. As such, we don't expect material changes to our $75 per share fair value estimate.
At face value, Lennar's reported year-over-year growth looks astonishingly strong, with homebuilding revenue up over 75% and new orders up 62%. However, comparing second-quarter 2018 results to the year-ago quarter doesn't give investors a fair representation of Lennar's true performance because this quarter includes full contribution from the CalAtlantic merger, which closed in February 2018, while the second-quarter of 2017 does not. Based on our pro forma analysis, which combined Lennar's and CalAtlantic's second-quarter 2017 results, we calculate that the combined entity grew homebuilding revenue approximately 11% and new orders were up over 11% -- still strong results, in our view. We note, however, that our pro forma analysis is imperfect because CalAtlantic's December year-end reporting calendar doesn't exactly align with Lennar's November year end.
Lennar was able to defend homebuilding gross margins despite input cost pressure. Excluding purchase accounting, Lennar's gross profit margin from home sales was 21.6% versus stand-alone Lennar's 21.5% and CalAtlantic's 20% in the year-ago quarter.
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Brian Bernard does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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