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Lennar (LEN): Homebuilding Strong, Rising Land Costs Hurt
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On Dec 22, we issued an updated research report on Lennar Corporation (LEN - Free Report) – a provider of homebuilding and financial services in the U.S.
Recently, Lennar reported fourth-quarter and fiscal 2016 numbers. The company delivered outstanding operating results in fiscal 2016 wherein earnings per share increased 13.6% year over year. Total revenue was also up 15.6% year over year.
Earnings estimates for fiscal 2017 moved up following the earnings release. Also, the company has an impressive earnings history, beating estimates for the fifth consecutive quarter. However, Lennar’s shares lost over 12% year to date, compared to the 2.9% decline for the Zacks categorized Building-Residential/Commercial industry, raising questions over this Zacks Rank #3 (Hold) company’s prospects.
Advantages
With the housing demand remaining strong, Lennar continued its solid performance in fiscal 2016, beating the Zacks Consensus Estimate for both earnings and sales in all the four quarters.
The company also surpassed the Zacks Consensus Estimate for both earnings and revenue in the fourth quarter of fiscal 2016 by 5.5% and 1.6%, respectively. Earnings increased 10.7% year over year driven by strong revenues and improved SG&A leverage. Revenues also grew 14.6% year over year, buoyed by higher deliveries.
The company is one of the best positioned homebuilders to capitalize on the housing recovery, courtesy of the diverse revenue mix, steady top-line performance, above-average order growth and improving SG&A leverage.
The company was successful in meeting its target to achieve the lowest SG&A percentage in its history in 2016. Lennar’s SG&A expenses contracted 50 basis points (bps) year over year to 8.7% during the fourth quarter, mainly attributable to higher home deliveries and benefits from digital marketing.
The segments also performed well in the quarter. In the fourth quarter of fiscal 2016, the homebuilding segment revenues increased 12.3% and financial services revenues increased 24.7% year over year.
Concerns
Gross margin on home sales declined 130 bps to 23.3% owing to rising land costs, partially offset by higher average sales price of homes delivered.
Rising land and labor costs are a threat to margins as they limit homebuilders’ pricing power. Labor shortages are leading to higher wages while land prices are on the rise due to limited availability.
With the Fed announcing a hike in the benchmark Federal Funds target rate, mortgage rates will probably rise in 2017 or after that. High mortgage rates dilute the demand for new homes as mortgage loans become expensive. This lowers purchasing power of the buyers and hurts volumes, revenues and profits of homebuilders.
Key Picks
Better-ranked stocks in the construction sector include Gibraltar Industries, Inc. (ROCK - Free Report) , Hovnanian Enterprises Inc. (HOV - Free Report) and AAON, Inc. (AAON - Free Report) .
Full-year 2016 earnings for Gibraltar are expected to grow 44.9%.
Hovnanian, a Zacks Rank #2 (Buy) stock, is likely to witness 28.6% growth in fiscal 2017 earnings.
AAON carries a Zacks Rank #2. Full-year 2016 earnings for the company are expected to rise 21.4%.
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Lennar (LEN): Homebuilding Strong, Rising Land Costs Hurt
On Dec 22, we issued an updated research report on Lennar Corporation (LEN - Free Report) – a provider of homebuilding and financial services in the U.S.
Recently, Lennar reported fourth-quarter and fiscal 2016 numbers. The company delivered outstanding operating results in fiscal 2016 wherein earnings per share increased 13.6% year over year. Total revenue was also up 15.6% year over year.
Earnings estimates for fiscal 2017 moved up following the earnings release. Also, the company has an impressive earnings history, beating estimates for the fifth consecutive quarter. However, Lennar’s shares lost over 12% year to date, compared to the 2.9% decline for the Zacks categorized Building-Residential/Commercial industry, raising questions over this Zacks Rank #3 (Hold) company’s prospects.
Advantages
With the housing demand remaining strong, Lennar continued its solid performance in fiscal 2016, beating the Zacks Consensus Estimate for both earnings and sales in all the four quarters.
The company also surpassed the Zacks Consensus Estimate for both earnings and revenue in the fourth quarter of fiscal 2016 by 5.5% and 1.6%, respectively. Earnings increased 10.7% year over year driven by strong revenues and improved SG&A leverage. Revenues also grew 14.6% year over year, buoyed by higher deliveries.
The company is one of the best positioned homebuilders to capitalize on the housing recovery, courtesy of the diverse revenue mix, steady top-line performance, above-average order growth and improving SG&A leverage.
The company was successful in meeting its target to achieve the lowest SG&A percentage in its history in 2016. Lennar’s SG&A expenses contracted 50 basis points (bps) year over year to 8.7% during the fourth quarter, mainly attributable to higher home deliveries and benefits from digital marketing.
The segments also performed well in the quarter. In the fourth quarter of fiscal 2016, the homebuilding segment revenues increased 12.3% and financial services revenues increased 24.7% year over year.
Concerns
Gross margin on home sales declined 130 bps to 23.3% owing to rising land costs, partially offset by higher average sales price of homes delivered.
Rising land and labor costs are a threat to margins as they limit homebuilders’ pricing power. Labor shortages are leading to higher wages while land prices are on the rise due to limited availability.
With the Fed announcing a hike in the benchmark Federal Funds target rate, mortgage rates will probably rise in 2017 or after that. High mortgage rates dilute the demand for new homes as mortgage loans become expensive. This lowers purchasing power of the buyers and hurts volumes, revenues and profits of homebuilders.
Key Picks
Better-ranked stocks in the construction sector include Gibraltar Industries, Inc. (ROCK - Free Report) , Hovnanian Enterprises Inc. (HOV - Free Report) and AAON, Inc. (AAON - Free Report) .
Gibraltar sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Full-year 2016 earnings for Gibraltar are expected to grow 44.9%.
Hovnanian, a Zacks Rank #2 (Buy) stock, is likely to witness 28.6% growth in fiscal 2017 earnings.
AAON carries a Zacks Rank #2. Full-year 2016 earnings for the company are expected to rise 21.4%.
Zacks' Top Investment Ideas for Long-Term Profit
How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>