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Lennar (LEN) Poised Well for 2016, Issues Linger: Hold Now?

We issued an updated research report on Lennar Corporation LEN on Apr 8, 2016.

After a strong 2014, Lennar delivered outstanding operating results in fiscal 2015 (ending on Nov 30). Moreover, it began 2016 on a solid note beating the Zacks Consensus Estimate for both earnings and sales in the first quarter (announced on Mar 29). Adjusted earnings increased 26% year over year driven by strong revenues, improved SG&A leverage and a lower tax rate. Revenues grew 21% on the back of strong homebuilding revenues.

With the overall strength in the housing sector as well as the macro environment, the Zacks Rank #3 (Hold) stock looks poised for strong performance in 2016. Management commented that even though the Fed rate hike may push mortgage interest rates up with it, an improving economy, growing consumer confidence as well as job and wage growth should keep the housing demand intact in 2016. Modest hikes in interest rates, in view of the improving economic environment, can be a net positive for the housing sector, according to Lennar.

We believe that Lennar is one of the best positioned homebuilders that can capitalize on this recovery driven by diverse revenue mix, strategic land investments and above-average order growth.

Moreover, its ancillary businesses — Rialto, Multi-Family, FivePoint and Financial Services — are evolving and likely to improve further in 2016. These growing platforms provide diversification as well as complementary long-term growth opportunities.

As the housing recovery gains momentum and competition for land assets intensifies, Lennar has strategically shifted away from a land heavy acquisition strategy to acquire lands with a shorter average life of two to three years. Rather, it wants to focus on slower but more orderly and sustainable growth to improve cash flows and profitability.

However, labor shortages, rising land, labor and construction cost and sales slowdown in Houston might put a check on the housing growth momentum in 2016.

A shortage of buildable lots, skilled labor and available capital for smaller builders are limiting home production, thereby lowering the inventory of homes, both new and existing. Limited capital for land and land development has left entitled lands in short supply. The labor market has also tightened with limited availability of labor thereby, arresting the rapid growth in housing production. Labor shortages are resulting in higher wages while land prices are inflating due to limited availability. Rising land and labor costs are thus threatening the gross margins of Lennar as well as other homebuilders like D.R. Horton, Inc. DHI, PulteGroup, Inc. PHM and KB Home KBH.

Moreover, Lennar’s sales trends have slowed down in Houston, particularly at higher price points in the wake of the oil slide. Texas’ economy is dependent on the oil complex and the volatility in the energy sector is hurting the region’s overall economic growth and, in turn, home sales. The company’s orders declined 12% in the Houston segment in fiscal 2015 and 3% in first-quarter 2016 due to lower demand.

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PULTE GROUP ONC (PHM): Free Stock Analysis Report
LENNAR CORP -A (LEN): Free Stock Analysis Report
KB HOME (KBH): Free Stock Analysis Report
D R HORTON INC (DHI): Free Stock Analysis Report
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