What Lennar's Strong Results Say About Housing Today
Lennar's strong third-quarter results and fiscal 2019 guidance are hardly reflective of a housing recovery that has run its course.
No-moat-rated Lennar (LEN) reported strong fiscal third-quarter results that easily beat management's and Wall Street's earnings expectations. Adjusted EPS of $1.61 topped management's guidance of $1.40 to $1.45 and the consensus estimate of $1.42. Lennar's homebuilding operations outperformed management's expectations; home sales revenue of $5.2 billion beat guidance by about 2%; adjusted home sales gross margin came in at 21.9% versus guidance of 21.5% to 21.75%; and selling, general, and administrative expenses as a percentage of home sales was 8.6% versus management's expectations of 8.7%.
While management slightly lowered its fourth-quarter 2018 guidance for home deliveries and orders because of "Hurricane Florence…and a bit of sluggishness in today's markets," Lennar's strong third-quarter results and fiscal 2019 guidance are hardly reflective of a housing recovery that has run its course. Indeed, pro forma new order volume increased 11% year over year, and management expects to deliver 53,000 homes in fiscal 2019, a 15% increase over 2018 home delivery guidance.
Lennar has been executing upon its "soft pivot" land strategy, which calls for moderate growth and a lighter land acquisition program, for several years now. However, Lennar appears positioned to double down on this strategy. Approximately 22% of Lennar's lot position is controlled through options or joint ventures. Management expects to increase this metric to 40% in a few years. We had not been modeling as aggressive of a shift to optioned land, which tends to generate lower gross profit margins but higher returns on invested capital, so this disclosure has a valuation impact. We lowered our 10-year average gross margin assumption to 22.6% (from 24% previously), and we now expect average inventory as a percentage of home sales to improve to about 70% over our 10-year forecast (versus 80% previously). As a result of these changes, our fair value estimate declined about 1.5% to $68 per share.
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Brian Bernard does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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