Tickers in this Article: LEN, HOV, PHM, KBH, DHI
Homebuilder Lennar Corp. (NYSE:LEN) posted a surprise profit due to its ancillary business and a legal settlement. Revenues fell as orders dropped amid the still difficult housing market. There is continuing vigorous debate about not only the prospects for Lennar, but the future of the housing market. (Learn about what happened to the housing market, see Why Housing Market Bubbles Pop.)

ARTICLE: Take Advantage Of A Housing Crisis - Rent!

Lennar's Performance
Although Lennar booked a profit in the quarter, partially boosted by its Rialto Investments segment, which had operating earnings of $11 million (net of $12 million of net earnings attributable to non-controlling interests), its homebuilding segment struggled. Rialto is focused on distressed real estate investment, management and workout.

Apart from Rialto, Lennar's homebuilding segment saw decreased revenue of 11% due to a 7% lower average sale price of homes. Sales incentives were $33,100 per home, down slightly from last year's same period, while the gross margin increased slightly to 20%. Other income in the segment was a net $30 million, almost all of which was from a litigation settlement.

Top and Bottom Lines
Lennar's net earnings were $27.4 million, or 14 cents a share, compared to a loss of $6.5 million or a loss of four cents per diluted share in the year ago quarter. Total revenue was $558 million, down 3%. Home deliveries were down 4% in the quarter, with both backlog and new orders off by 12%.

If the Rialto and other ancillary earnings are stripped out, it shows the core homebuilding at Lennar is not yet robust enough to carry on company profitability. However, the trend, despite the still difficult business, at least shows improvement.

Homebuilding Peers
Lennar's sluggish results in its homebuilding segment are still relatively good in an industry that's reeling. Hovnanian Enterprises (NYSE:HOV) has suffered steep losses, while Pulte Group (NYSE:PHM) has recorded four years in a row in the red. KB Home (NYSE:KBH) due to report earnings soon, is expected to have at least trimmed its losses, while DR Horton (NYSE:DHI), a brighter spot in the industry, has re-entered the black.

Housing Industry Debate
A fierce debate rages about the immediate and long-term prospects of the housing industry. Not to over-simplify, but the bulls see the housing industry at a historic low point ready to inevitably bounce back. There's never been this kind of decline, so the reasoning goes, without a strong snapback. The bears point to the data showing horrid new home sales, which dropped 28% this February measured year-over-year.

There might be a more nuanced, complex view. Given the changing demographics in the United States with an aging population, along with a host of economic pressures, it's hardly a slam-dunk that the housing market is going to simply return to the way it was pre-recession. High unemployment and tightened lending are two major pressures of affordability that are likely to persist. The fundamentals of the industry have been more than slightly altered. (To learn more, see What Are A Stock's "Fundamentals"?)

The Bottom Line
As far as fundamentals go for Lennar, beyond its prospects in a suffering industry and despite its recent improved results, the company carries high debt and will struggle even in a better environment.

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