A Homebuilder Cementing Hopes of Recovery

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For the seventh straight quarter, Lennar (NYS: LEN) has managed to stay in the black, churning out impressive fourth-quarter numbers. When a biggie from a bleeding industry comes out with a pleasant surprise, we better take note.  

Can Lennar be the stock to build hopes on with the industry showing signs of recovery?

Moving up, up, up
You need to give a thumbs-up to Lennar for dishing out higher orders, deliveries, and backlogs -- the three key metrics a homebuilder's business is built upon.

While new orders climbed an impressive 20% from last year, home deliveries went up by 9%. This, along with a marginal rise in average selling prices, helped Lennar's homebuilding revenues rise by a good 13% to $816.5 million. A rise in deliveries comes as a healing balm for an industry that was left gasping for breath after sales-boosting federal tax credits expired last year. Buyers' slow return to the market is evident not just from Lennar's numbers, but also from those of other industry players.

KB Home's (NYS: KBH) new orders surged a superb 38% in its fourth quarter. Although its deliveries improved only 4%, what was remarkable was the staggering 74% rise in its backlogs. Even the otherwise not-so-impressive builder Beazer Homes (NYS: BZH) reported impressive 23% and 33% jumps in home closings and new orders, respectively, in its last quarter. Its backlogs shot up by 81%, too.

Lennar's backlog rose nearly 38%, to $560.7 million, indicating higher potential revenues. But it's not just homebuilding that is keeping Lennar up and running.

The Rialto advantage
What distinguishes Lennar from most of its peers is that the company has tried to offset housing-slump losses by making money in its profitable Rialto Investments division, which invests in distressed real estate assets. In the fourth quarter, this division's revenues more than doubled, contributing $46.5 million to Lennar's top line. 

Unfortunately, in spite of higher revenues, Lennar couldn't turn up higher profits. Higher expenses pertaining to selling, general and administration costs, and interest dented Lennar's bottom line, taking it down to $30.3 million, from $32 million a year ago.

Stepping in where others haven't
The one move that stood out in the last quarter was Lennar's foray into a new market. The company bought more than 650 lots in Seattle and Portland areas last month, which is expected to add around 200 deliveries in the latter half of this year.

What's worth noting is that the company had last tapped a new market in early 2010. This shows how Lennar is utilizing these low times to enter markets with potential. In fact, Lennar is not the only one that has entered Seattle. Upscale homebuilder Toll Brothers (NYS: TOL) made the bold move of lapping up a Seattle-based homebuilder sometime back, adding a new market to its collection.

Lennar, in fact, made significant investments in the fourth quarter. It purchased around 3,800 home sites in total, worth around $162 million, and also shelled out $56 million on land development.

It looks like the company is gearing up for a housing recovery with carefully selected investments.

The Foolish bottom line
Positive housing data in the past few months have kept the housing industry brimming with optimism. True, the housing sector has to cover a long distance before it can reach a land that's free from inventory glut, foreclosures, or high unemployment. But the fact that Lennar has been generating profits in such situations is commendable. The Rialto advantage adds to Lennar's charm, together with higher orders and backlogs. And it's one of the few homebuilders that keeps filling your pockets with a consistent dividend (never mind the meager yield of 0.7% here).

Stay tuned, as the next few days will see a flurry of housing news and data coming your way. To remain up to date on all the news on Lennar and the housing sector, click here to add Lennar to your stock watchlist, our free and personalized stock-tracking service.

At the time this article was published Neha Chamaria does not own shares of any of the companies mentioned in this article.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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