A First Look at Lennar (LEN)

What does Lennar do to earn money?

Lennar builds and sells new homes targeted at value-oriented, first-time, and move-up purchasers in 14 states across the country. In 2010, the company delivered approximately 11,000 homes at an average price of roughly $240,000. Lennar also provides title and mortgage-related services. Outside of its core operations, Lennar maintains investments in a portfolio of numerous joint ventures and operates a distressed real estate focused unit, Rialto Investments.

Lennar’s stock price peaked in 2005 just above $60 per share.  Since then the stock price has lost 70% down to today’s $17.93.  I think it will go lower when the world reenters recession sometime in the next year.

Morningstar’s take (not mine)- Lennar sits poised to reap major economic gains from an eventual rebound in housing. The firm has fortified its operations and balance sheet amid the collapse in demand during the last few years. Core construction benefits from streamlined designs, more centralized purchasing, and closer-to-order building practices. Overhead cuts of more than 50% from peak further ensure that eventual increases in revenue fall meaningfully to the bottom line. At the same time, Lennar has bolstered its balance sheet with liquidation of once-bloated inventory, multiple debt refinancings to extend maturities, and strategic equity sales during the last several years. The company also has reduced risk by trimming its once voluminous joint venture portfolio to stable partners, reducing contingent recourse debt liabilities by approximately $1 billion or 80%.

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DIVIDEND RECORD

Lennar has paid a dividend every quarter since 1988 as far as I can tell with the Google Finance data.  However, it cut its quarterly dividend from $0.16 to $0.04 in the 4th quarter of 2008.  The dividend has remained at $0.04 for thirteen consecutive quarters.

Dividend: $0.04 quarterly

Dividend yield: 0.8% ($0.16 annual dividend / $17.93 share price)

Dividend payout ratio: 33.3% ($0.16 annual dividend / $0.48 mean EPS estimate for 2011)

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EARNING POWER – Lennar’s six year average adjusted earnings is ($2.40) per share.  If you believe that the new housing market will recover in the next few years (I don’t), then you would ignore the “bust” years of 2007 – 2009.  Today’s Lennar does not resemble the Lennar of 2006, so throw out that year also.  This leaves you with 2010 and most of 2011.  Lennar has an earning power of $0.495 per share at 187.01 million shares in the past 2 years (assuming $0.16 EPS in 4Q 2011).

                        EPS                   Net Inc.             Shares               Adj EPS

2006                 $3.69                $593.9 M           160.7 M             $3.18

2007                 ($12.31)            ($1,941.1 M)     157.7 M             ($10.38)

2008                 ($7.00)             ($1,109.1 M)     160.6 M             ($5.93)

2009                 ($2.45)             ($417.1 M)        170.5 M             ($2.23)

2010                 $0.51                $95.3 M             188.9 M             $0.51

2011E               $0.48 E             $87.76 M E        187.01 M           $0.48 (mean estimate)

Six year average adjusted EPS = ($2.40)

Quarterly earnings results for 2011:

            Q1        $0.14                $27.4 M                                     $0.146

            Q2        $0.07                $13.8 M                                     $0.073

            Q3        $0.11                $20.7 M             187.01 M           $0.11

            Q4        $0.16 E             $29.9 M E          187.01 M           $0.16 E

            Total     $0.48 E             $87.76 M E        187.01 M           $0.48 (mean estimate on Morningstar.com)

If you believe the new housing market will not recover in the next few years, then do not buy Lennar because it is barely profitable in the last six quarters.  A continued recession will likely return them to unprofitability.

If you believe that the new housing market will at least stabilize in the next few years, then use the following valuations to help you buy low:

Consider contrarian buying below $3.96 (8x the 2 year avg. adjusted EPS)

Consider value buying below $5.94 (12x the 2 year avg. adjusted EPS)

Consider speculative selling above $9.90 (20x the 2 year avg. adjusted EPS)

Lennar is currently trading at 36.2 times the two year average adjusted earnings.  This is highly speculative pricing.

BALANCE SHEET

Lennar has stabilized its balance sheet since the end of 2010.  It has more than enough money to cover short term liabilities.

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Book value per share:  $14.28

Price to book value ratio: 1.26 (that’s pretty good)

Current ratio: 6.48 in the latest quarter (that’s really good; over 2.0 is good)

Quick ratio: 1.91 in the latest quarter (that is also very good; over 1.0 is good)

CONCLUSION

I think that the new housing market will not recover in the next few years because the US government is taking actions to stabilize then stimulate the housing market.  The market price system is being retarded by government intervention and accounting rules changes that are incentivizing banks not to put all the bank owned properties on the market (this is known as the shadow inventory).  There will be an eventual turnaround in the new housing market because of increased populations, but it is many years away.  Please visit this link (http://tinyurl.com/7fx5o2b ) to read many articles on the ill-fated housing recover based on the Austrian economics perspective.

Lennar is speculatively priced at over 36 times it 2 year average earnings.  It has a puny dividend yield below the S&P 500 average.  And its balance sheet is nothing to boast about.  Its Rialto real estate fund/portfolio is heavily dependent on short term financing and an economic rebound that isn’t going to happen thanks to the Keynesian fools that run the Federal Reserve and the US government.  Pass on Lennar until much lower prices and higher dividend yields.

Just for giggles I looked up the earnings for the past 10 years on Morningstar.com (unadjusted).  With boom and bust years of the past ten years its average EPS only comes out to $0.73 per share.  The stock price would have to fall to $8.71 just to equate to 12 times its ten year average EPS.  That’s not even value pricing.  Lennar is overpriced by any measurement you wish to consider.

DISCLOSURE – I don’t own Lennar (LEN)

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Published in: on November 8, 2011 at 2:32 pm  Leave a Comment  

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