Is It Too Late to Buy High-Flying Lennar?


Despite rising interest rates and some troubling data regarding the housing recovery, homebuilder Lennar beat analyst estimates and showed a cheery outlook for the coming quarters—delighting investors and analysts. Now, with the stock up nearly triple digits over a period of two years, is Lennar still ripe for investment? Let's take a closer look at earnings and what's ahead to find out.

The numbers
Whether you believe in the longevity of the housing recovery or not, Lennar is certainly producing. The company boasted a 53% jump in revenue over the prior year's quarter to $1.4 billion. Wall Street had been expecting $100 million less. Home deliveries gained 39%, while the average sales price per home jumped 13%.

On a GAAP basis, bottom-line earnings looked meek compared with 2012. The company brought in $0.61 per share, compared with $2.06 per share last year. Investors should note, however, that last year's number included a large gain from the reversal of tax-deferred assetallowance. The allowance accounted for $1.85 per share, bringing last year's adjusted earnings to just $0.21 per share.

New home orders rose 27%, while the backlog of homes hit 6,163 -- a 55% gain. The dollar value of that backlog represents a 76% increase. Sales incentives were down to 7.2% of revenue from 11.3% in 2012.

Interest rates and the future
As mentioned by management, there is substantial headline risk given the Fed's recent comments regarding rising interest rates. Normally, this would decrease the affordability of homes. Yet Lennar management cites a still tight supply, growing population, and enduring affordability as evidence of a continued, straight-line housing recovery.

This may be a unique situation to Lennar. In several communities across the United States, home prices have surged double digits year-over-year, and credit standards remain very tight. Lennar management is correct that buying remains more attractive than renting, but there is plenty of evidence suggesting affordability is not quite as low as advertised.

Still, Lennar's backlog bodes for a very successful 2013. Additionally, the company has a strong management team that hasn't been afraid to spell trepidation in the fragile housing market. Their bullishness lends much confidence to the market.

Lennar trades at just under 15 times forward earnings, which puts it right in the middle of competitors such as KB Homes and DR Horton. KB Homes has been a beneficiary of the housing shortage, just like Lennar, but its valuation is substantially richer.

At this point, both companies are trading at premiums that reflect the industry's bullishness. Now is not the time to jump in on the housing recovery -- that moment has passed.

Lennar will probably continue to do well, and if you are valuation-blind, it's certainly not a bad investment. For the price-conscious, though, wait for the correction.

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