Keep an Eye on This Homebuilder Turnaround

Surprise! Here's a homebuilder that seems to be doing rather well in the bleeding housing market. For the sixth straight quarter, Lennar (NYS: LEN) has managed to stay in the black, and expects to remain so in the near future. Its third-quarter bottom line has beaten Street estimates, and there's more good news in terms of higher orders and backlogs.

Is Lennar confirming a slow yet long-awaited housing recovery, and could it be the stock to build hopes on?

It's not so bad
Home deliveries have been hit across the board after the expiration of the sale-boosting federal tax credits last year. KB Home has recently reported a 31% fall in the number of homes delivered in its third quarter, while Toll Brothers (NYS: TOL) witnessed a 14% drop in its third-quarter home deliveries. Beazer Homes' (NYS: BZH) and Pulte Group's (NYS: PHM) home closings also dropped steeply by 49.2% and 28% in their third and second quarters, respectively.

In such a situation, Lennar seems to be in a much better position, with just a 3% fall in homes delivered. Moreover, a same percentage rise in average sales prices of homes helped offset the fall. Thus, Lennar's homebuilding revenue just dropped marginally to $700.6 million from $697.4 million in the year-ago quarter.

While Lennar's gross margin has improved significantly from 12.7% to 22.4% year on year, higher expenses pertaining to selling, general and administration, and interest weighed down on operations, leading to a 31% slip in net profits to $20.7 million.

Encouraging signs
Lower profits might not be encouraging, but there are some positive things worth noting here.

Customers are slowly coming back into the market. This is evident from an 11% rise in Lennar's new home orders.

Moreover, for homebuilders, backlogs -- the indicators of future business -- are critical. Lennar's backlog units went up by 16% in the quarter, indicating higher potential revenue. All these are positive signs.

An interesting thing about Lennar that distinguishes it from most peers is how it has tried to make up for the housing slump losses by churning in money from its Rialto Investments division, which invests in distressed real estate assets. This segment has been proving profitable for Lennar, with revenue climbing 10.8% this quarter. This division is thus helping the company balance out low homebuilding earnings.

New plan on the anvil
The U.S. government is contemplating renting foreclosed homes. Lennar has apparently shown interest in this and appears keen on participating should something like that occur.

If Lennar gets involved, it will be similar to peer Beazer's buying and renting out foreclosed homes strategy that started off this year. But how far the plan materializes for Lennar is yet to be seen.

The Foolish bottom line
Foreclosures, no more tax credits, high unemployment, and overall economic gloom -- these factors have been affecting home sales badly. But the fact that Lennar has been generating profits in such situations is commendable. Higher orders and backlogs are encouraging, and Lennar benefits from Rialto. I feel all this makes Lennar one of the few homebuilders that could be worth keeping an eye on. Click here to add Lennar to your stock watchlist.

At the time thisarticle was published

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