Homebuilder Lennar (click ticker for report: ) reported fantastic third-quarter results Monday. Revenue at the homebuilder surged 34% year-over-year to $1.1 billion, meaningfully better than the consensus expectation. Earnings grew well over 3-fold to $0.40 share, more than ten cents better than consensus estimates.
Like KB Home (click ticker for report: ), which reported strong results last week, Lennar saw improving metrics across the board. Average selling prices increased 4% to $258,000, and deliveries surged 28% year-over-year to 3,617 units. Gross margins also expanded by 220 basis points as input costs had a minimal impact on the bottom line. SG&A fell 230 basis points as a percentage of sales, indicating the firm’s ability to leverage fixed costs. Lennar’s backlog also grew considerably, up 79% on a unit basis and 95% on a value basis, suggesting the firm will have plenty of growth ahead. The company also saw new orders surge 44% with a cancelation rate of just 17%.
Unlike KB Home, Lennar has a sizable financial arm that engages in mortgage origination. With demand improving, earnings from the segment grew over 300% to $25.3 million. Though the segment focuses primarily on its own properties, management noted that it sees opportunities to grow profitability via refinancing transactions. Rialto, an operating subsidiary that manages a large asset portfolio, also added $7.7 million to earnings during the third quarter. Management also feels confident that Rialto will be able to grow alongside the homebuilder business.
We’re very positive on Lennar’s market position going forward. One of the major issues negatively impacting smaller homebuilders is access to capital, a problem the firm doesn’t have. It raised $400 million in debt via a private placement transaction during the third quarter. Though the deal mostly retires more expensive debt, we think the firm has ample liquidity to ramp production if the housing market substantially accelerates. Management also noted that it sees the housing recovery as being well underway and that it isn’t facing input cost increases that will severally impact profitability.
Even though we like the trends we are seeing in the domestic housing market, we believe shares of the homebuilders are fairly valued at current levels. Lennar has been incredibly strong, technically, scoring a 7 on the Valuentum Buying Index (our stock-selection methodology), but we continue to prefer diversified exposure to banking ETF’s to gain exposure to the strengthening domestic housing market (XLF, KBE). Though we don’t think Lennar’s share price offers a margin of safety wide enough for us to include it in the portfolio of our Best Ideas Newsletter, we expect further upside from current levels ($40 represents the high end of our fair value range).