Homebuilder Lennar Corp. (NYSE:LEN) posted a 31% lower profit for its fiscal third quarter, as the still weak consumer was hurt by high unemployment and tighter lending standards such as higher down payment requirements. Although Lennar delivered fewer new homes during the quarter, new orders show demand picking up slightly.
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Still a Struggle
Lennar's net income for its third quarter fell to $20.7 million, or 11 cents per diluted share, from $30 million or 16 cents per diluted share in the year ago quarter. Earnings were in line with analyst expectations, though. Revenue dipped slightly from $824.9 million to $820 million. Gross margin on home sales was 21.1%, which was a 170 basis points improvement sequentially over second quarter margins. Operating margins on home sales were 6.8%, which improved 240 basis points from the second quarter, but was down 40 points from the third quarter of last year. Deliveries of homes were down 3% from the third quarter of 2010, while new orders were up 11% from last year's third quarter. CEO Stuart Miller said this was the first quarterly increase in new orders in five years, excluding the first half of 2010 which had a positive impact from the Federal First-Time Homebuyers Tax Credit. (For related reading, see Analyzing Operating Margins.)
Slight Demand Pick up Vs. Ongoing Headwinds
Lennar, like other homebuilders, is a window on the economy. Housing construction contributes significantly to economic activity, even though most of the housing market consists of already-built homes. According to the National Association of Homebuilders, the construction of a new home adds on average of three new jobs for a year and about $90,000 in taxes to the economy. The ongoing well-known headwinds for new construction are at least being accompanied by some signs of better demand, due to low interest rates and relatively low prices.
Toll Brothers (NYSE:TOL) reported a mixed third quarter, with adjusted income increased but revenue down by 13%, due to new deliveries declining by 14%. While those mixed results might ordinarily appear unimpressive, even positive net income has been difficult to come by for some in the industry. DR Horton (NYSE:DHI), had its first profitable year in years while KB Home (NYSE:KBH) only had one profitable quarter in the past seven quarters. Meritage Homes'(NYSE:MTH) most recent quarter showed poor results, with substantially lower adjusted earnings of four cents per share, though the company beat estimates othat called for a loss of four cents per share.
Sentiment in the industry remains low. A recent National Association of Homebuilders NAHB/Wells Fargo Housing Market Index slipped to 14 from the month ago reading of 15, indicating continued low confidence among homebuilders. Any reading below 50 is viewed as a poor outlook, and a reading of 50 hasn't been reached since 2006. So even the slight gains the homebuilders may have made haven't pulled up the industry or its outlook much.
The Bottom Line
The homebuilders have been on the front lines of economic woes for some time. As a part of the housing industry, many of the builders provide financing as well, so the mortgage industry issues and everything related that's contributed to real estate woes has affected companies like Lennar. Lennar is still fighting through the challenged economy, but at least new orders are picking up. Investors will want to watch this to look for a positive trend, and look for other improvements to see if Lennar and the other homebuilders can make the better performance stick. Unless you are a very adventurous investor, who loves to play turnarounds or even long shots, Lennar and the others in the industry are still a good distance away from being real bargains or value plays. (Learn the techniques that Buffett, Lynch and other pros used to make their fortunes. For more, see The Value Investor's Handbook.)
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