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Lennar’s (LEN) Q4 Earnings Beat, Revenues Miss Estimates

Zacks

Lennar Corporation LEN reported fourth quarter of fiscal 2018 (ended Nov 30, 2018) results, wherein earnings surpassed the Zacks Consensus Estimate while revenues missed the same. Management acknowledges that sales continued to be impacted by housing market headwinds like rising mortgage rates and higher home prices. Nonetheless, it believes that underlying fundamentals of lower unemployment, higher wages and low inventory levels remain conducive to the industry.

The company’s fourth-quarter adjusted earnings of $1.96 per share topped the consensus mark of $1.93 by 1.6%. The reported figure mainly excludes acquisition and integration costs related to CalAtlantic Group, Inc. as well as the gain on sale of Rialto investment and asset management platform.

Including these items as well as backlog/construction in progress write-up related to purchase accounting, the reported figure came in at $2.42 per share in the quarter, increasing considerably from the year-ago profit level of $1.29.

Total revenues of $6.46 billion missed the consensus mark of $6.53 billion but increased 70.6% year over year as the Homebuilding, Financial Services and Multifamily business segments performed significantly well.

Lennar Corporation Price, Consensus and EPS Surprise

Lennar Corporation Price, Consensus and EPS Surprise | Lennar Corporation Quote


Segment Details

Homebuilding: The segment’s revenues increased 77.8% from the prior-year quarter to $6.07 billion, driven by higher number of homes delivered and greater average selling prices. Within the Homebuilding umbrella, home sales constituted $5.95 billion (up 78.5% year over year) and land sales amounted to $114.2 million (up 47.9%).

New home orders increased 44% from the year-ago quarter to 10,611. Potential value of net orders increased 49% year over year to $4.2 billion.

Home deliveries increased 64% from the prior-year quarter to 14,154, buoyed by higher number of homes delivered across all homebuilding segments, courtesy of significant increase in volume resulting from the CalAtlantic acquisition.

The average sales price (ASP) of homes delivered was $421,000, reflecting an 8.5% year-over-year increase.

In the quarter under review, backlog grew 75% from the year-ago quarter to 15,616 homes. Potential housing revenues from backlog increased 85% year over year to $6.6 billion.

Margins

Gross margin on home sales was 21.4% in the quarter compared with 22.4% a year ago. Excluding the above-mentioned backlog/construction in progress write-up, gross margin on home sales was 22.1%. The decline was due to higher construction costs that were partially offset by an increase in the average sales price of homes delivered.

As a percentage of home sales, SG&A (selling, general and administrative) expenses improved 50 basis points to 7.9% from 8.4% a year ago. The improvement was due to improved operating leverage, owing to higher home deliveries. Benefits from technology initiatives also added to the positives.

Financial Services: Financial Services revenues increased 14.9% to $228.3 million in the quarter. Operating earnings at the segment were $58.7 million, up from $42.1 million a year ago.

Rialto Investments: Rialto Investments’ revenues of $56 million decreased from $73.4 million a year ago. The segment reported operating loss of $46.4 million in the quarter against earnings of $2.2 million in the year-ago quarter.

Lennar Multi-Family: Lennar Multi-Family revenues of $109.1 million increased from $102.9 million recorded in the prior-year quarter. The segment generated operating earnings of $33 million in the quarter versus $38.6 million a year ago.

Financials

Lennar Homebuilding’s cash and cash equivalents totaled $1.34 billion as of Nov 30, 2018, down from $2.28 billion on Nov 30, 2017. Net homebuilding debt of the company was $7.2 billion as of Nov 30, 2018 compared with $4.1 billion recorded in the corresponding period last year.

Rialto

On Nov 30, 2018, Lennar divested its Rialto Investment and Asset Management business segment to Stone Point Capital LLC, a private-equity firm, for $340 million. This Miami-based company retained the Rialto Mortgage Finance business along with interests in Rialto fund investments, and other funds as well as investments in Rialto balance sheet assets. Meanwhile, Lennar shifted its Rialto Mortgage Finance unit into the Financial Services business (effective Dec 1, 2018).

Meanwhile, in the fourth quarter, Lennar contracted to sell Berkshire Hathaway real estate brokerage business, and the majority of retail title business as well as its title insurance underwriter. Both the transactions have completed in the first quarter of fiscal 2019.

Fiscal 2018 Highlights

Adjusted earnings came in at $6.35 per share in the fiscal year. Including the one-time items discussed above, earnings were $5.44 per share compared with $3.38 a year ago. Revenues of $20.6 billion grew 63% and deliveries increased 55% from a year ago. Gross margins on home sales were 19.6% compared with 22.1% in fiscal 2017. Adjusted gross margins on home sales came in at 21.8%.

Guidance

Owing to the ongoing softness and uncertainty surrounding this seasonally slower time of the year, Lennar deferred its guidance for fiscal 2019.

Zacks Rank & Key Picks

Currently, Lennar carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Zacks Construction sector are KBR, Inc. KBR, Gates Industrial Corporation PLC GTES and Great Lakes Dredge & Dock Corporation GLDD. While KBR sports a Zacks Rank #1 (Strong Buy), Gates Industrial and Great Lakes carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

KBR surpassed earnings estimates in three of the trailing four quarters, resulting in average positive surprise of 12.6%.

Gates Industrial and Great Lakes’ 2019 earnings are expected to grow 9.7% and 1,400%, respectively.

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